With a price-to-earnings (or “P/E”) ratio of 47.1x Maheshwari Logistics Limited (NSE:MAHESHWARI) may be sending very bearish signals at the moment, given that almost half of all companies in India have P/E ratios under 15x and even P/E’s lower than 7x are not unusual. Nonetheless, we’d need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
As an illustration, earnings have deteriorated at Maheshwari Logistics over the last year, which is not ideal at all. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.
We don’t have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Maheshwari Logistics’ earnings, revenue and cash flow.
Is There Enough Growth For Maheshwari Logistics?
There’s an inherent assumption that a company should far outperform the market for P/E ratios like Maheshwari Logistics’ to be considered reasonable.
Retrospectively, the last year delivered a frustrating 61% decrease to the company’s bottom line. The last three years don’t look nice either as the company has shrunk EPS by 36% in aggregate. Therefore, it’s fair to say the earnings growth recently has been undesirable for the company.
Comparing that to the market, which is predicted to deliver 12% growth in the next 12 months, the company’s downward momentum based on recent medium-term earnings results is a sobering picture.
With this information, we find it concerning that Maheshwari Logistics is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company’s business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.
The Bottom Line On Maheshwari Logistics’ P/E
The price-to-earnings ratio’s power isn’t primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We’ve established that Maheshwari Logistics currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders’ investments at significant risk and potential investors in danger of paying an excessive premium.
Having said that, be aware Maheshwari Logistics is showing 4 warning signs in our investment analysis, and 1 of those can’t be ignored.
If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E’s below 20x.
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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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