Amiad Water Systems Ltd.'s (TLV:AMD) 25% Share Price Surge Not Quite Adding Up

Amiad Water Systems Ltd. (TLV:AMD) shares have had a really impressive month, gaining 25% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 17% in the last twelve months.

Since its price has surged higher, given close to half the companies in Israel have price-to-earnings ratios (or "P/E's") below 12x, you may consider Amiad Water Systems as a stock to avoid entirely with its 21.8x 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 lofty.

Recent times have been quite advantageous for Amiad Water Systems as its earnings have been rising very briskly. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Amiad Water Systems

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 Amiad Water Systems' earnings, revenue and cash flow.

Is There Enough Growth For Amiad Water Systems?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Amiad Water Systems' to be considered reasonable.

Retrospectively, the last year delivered an exceptional 44% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 50% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

This is in contrast to the rest of the market, which is expected to grow by 17% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Amiad Water Systems is trading at a P/E higher than the market. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Bottom Line On Amiad Water Systems' P/E

Amiad Water Systems' P/E is flying high just like its stock has during the last month. 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.

Our examination of Amiad Water Systems revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Amiad Water Systems that you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.