Moderate growth No price barrier from Mahube Infrastructure Limited (JSE: MHB)
Mahube Infrastructure Limited (JSE: MHB) A price-to-earnings (or “P / E”) ratio of 25.3x could give the impression that selling is strong right now compared to the South African market, where around half of companies have P / E ratios below 13x and even P / E below 7x are quite common. Nonetheless, we’ll need to dig a little deeper to determine if there is a rational basis for the very high P / E.
For example, consider that Mahube Infrastructure’s financial performance has been poor lately as its profits have declined. One possibility is that the P / E is high because investors believe the company will still do enough to outperform the overall market in the near future. You really hope so, otherwise you are paying a pretty high price for no particular reason.
Check out our latest review for Mahube Infrastructure
Want a complete picture of the company’s profits, revenues and cash flow? Then our free Mahube Infrastructure report will help you shed light on its historical performance.
How is the growth of Mahube Infrastructure evolving?
Mahube Infrastructure’s P / E ratio would be typical of a company expected to generate very strong growth and, most importantly, much better performance than the market.
Looking back at the results of the past year, the company’s profits have fallen discouragingly by 70%. The past three years aren’t looking good either, as the company has cut its EPS by 72% overall. So unfortunately we have to recognize that the company did not do a great job of increasing its profits during this period.
The weighting of this medium-term earnings path against the 61% broad market expansion forecast shows that this is an unpleasant aspect.
With this information, we are concerned that Mahube Infrastructure is trading at a higher P / E than the market. It appears that most investors are ignoring the recent low growth rate and are hoping for a turnaround in the company’s business outlook. Only the more daring would assume that these prices are sustainable, as the continuation of recent earnings trends is likely to weigh heavily on futures stock prices.
The key to take away
As a general rule, we prefer to limit the use of the price / earnings ratio to establishing what the market thinks about the overall health of a business.
We have established that Mahube Infrastructure is currently trading at a much higher P / E than expected as its recent earnings have been declining over the medium term. When we see earnings pull back and underperform the market forecast, we think the stock price may go down, pushing the high P / E down. Unless recent medium-term conditions improve significantly, it is very difficult to accept these prices as reasonable.
Before proceeding to the next step, you should know the 5 warning signs for Mahube Infrastructure that we discovered.
Of course, you might also be able to find a better stock than Mahube Infrastructure. So you might want to see this free set of other companies whose P / E is less than 20x and whose profits have risen sharply.
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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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