Even With A 33% Surge, Cautious Investors Are Not Rewarding C. Mer Industries Ltd.'s (TLV:CMER) Performance Completely

C. Mer Industries Ltd. (TLV:CMER) shareholders are no doubt pleased to see that the share price has bounced 33% in the last month, although it is still struggling to make up recently lost ground. The annual gain comes to 114% following the latest surge, making investors sit up and take notice.

In spite of the firm bounce in price, C. Mer Industries' price-to-earnings (or "P/E") ratio of 11.8x might still make it look like a buy right now compared to the market in Israel, where around half of the companies have P/E ratios above 17x and even P/E's above 26x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

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C. Mer Industries certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. 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.

Check out our latest analysis for C. Mer Industries

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on C. Mer Industries 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 low as C. Mer Industries' is when the company's growth is on track to lag the market.

If we review the last year of earnings growth, the company posted a terrific increase of 87%. Pleasingly, EPS has also lifted 363% in aggregate from three years ago, thanks to the last 12 months of growth. 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 9.8% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.

In light of this, it's peculiar that C. Mer Industries' P/E sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Final Word

The latest share price surge wasn't enough to lift C. Mer Industries' P/E close to the market median. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that C. Mer Industries currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

And what about other risks? Every company has them, and we've spotted 2 warning signs for C. Mer Industries (of which 1 makes us a bit uncomfortable!) you should know about.

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

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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.