Yahoo Finance MHM Automation Limited (NZSE:MHM) Screens Well But There Might Be A Catch
When close to half the companies in New Zealand have price-to-earnings ratios (or "P/E's") above 22x, you may consider MHM Automation Limited (NZSE:MHM) as a highly attractive investment with its 10.7x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.
Recent times have been quite advantageous for MHM Automation as its earnings have been rising very briskly. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.
View our latest analysis for MHM Automation
Want the full picture on earnings, revenue and cash flow for the company? Then our free report on MHM Automation will help you shine a light on its historical performance.
Does Growth Match The Low P/E?
The only time you'd be truly comfortable seeing a P/E as depressed as MHM Automation's is when the company's growth is on track to lag the market decidedly.
Taking a look back first, we see that the company grew earnings per share by an impressive 339% last year. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.
Weighing the recent medium-term upward earnings trajectory against the broader market's one-year forecast for contraction of 3.3% shows it's a great look while it lasts.
With this information, we find it very odd that MHM Automation is trading at a P/E lower than the market. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.
The Bottom Line On MHM Automation's P/E
We'd say 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 MHM Automation currently trades on a much lower than expected P/E since its recent three-year earnings growth is beating forecasts for a struggling market. We think potential risks might be placing significant pressure on the P/E ratio and share price. Perhaps there is some hesitation about the company's ability to stay its recent course and swim against the current of the broader market turmoil. At least the risk of a price drop looks to be subdued, but investors think future earnings could see a lot of volatility.
You should always think about risks. Case in point, we've spotted 1 warning sign for MHM Automation you should be aware of.
Of course, you might also be able to find a better stock than MHM Automation. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
