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Fewer Investors Than Expected Jumping On Maxim Power Corp. (TSE:MXG)

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When close to half the companies in Canada have price-to-earnings ratios (or "P/E's") above 11x, you may consider Maxim Power Corp. (TSE:MXG) as a highly attractive investment with its 2.4x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

With earnings growth that's exceedingly strong of late, Maxim Power has been doing very well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Maxim Power

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Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Maxim Power will help you shine a light on its historical performance.

Does Growth Match The Low P/E?

In order to justify its P/E ratio, Maxim Power would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered an exceptional 98% gain to the company's bottom line. The latest three year period has also seen an excellent 1,101% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Comparing that to the market, which is only predicted to deliver 16% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.

With this information, we find it odd that Maxim Power is trading at a P/E lower than the market. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Final Word

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Maxim Power currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Maxim Power that you need to be mindful of.

If these risks are making you reconsider your opinion on Maxim Power, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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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