Mader Group Limited (ASX:MAD) shares have continued their recent momentum with a 26% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 62%.
In spite of the firm bounce in price, Mader Group's price-to-earnings (or "P/E") ratio of 14.1x might still make it look like a buy right now compared to the market in Australia, where around half of the companies have P/E ratios above 19x and even P/E's above 39x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Mader Group could be doing better as it's been growing earnings less than most other companies lately. The P/E is probably low because investors think this lacklustre earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.
Want the full picture on analyst estimates for the company? Then our free report on Mader Group will help you uncover what's on the horizon.
What Are Growth Metrics Telling Us About The Low P/E?
There's an inherent assumption that a company should underperform the market for P/E ratios like Mader Group's to be considered reasonable.
Taking a look back first, we see that the company managed to grow earnings per share by a handy 11% last year. This was backed up an excellent period prior to see EPS up by 147% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.
Looking ahead now, EPS is anticipated to climb by 15% per year during the coming three years according to the only analyst following the company. Meanwhile, the rest of the market is forecast to expand by 14% each year, which is not materially different.
In light of this, it's peculiar that Mader Group's P/E sits below the majority of other companies. It may be that most investors are not convinced the company can achieve future growth expectations.
What We Can Learn From Mader Group's P/E?
The latest share price surge wasn't enough to lift Mader Group's P/E close to the market median. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
We've established that Mader Group currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. When we see an average earnings outlook with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.
It is also worth noting that we have found 3 warning signs for Mader Group that you need to take into consideration.
You might be able to find a better investment than Mader Group. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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