Elspec Engineering Ltd's (TLV:ELSPC) Subdued P/E Might Signal An Opportunity

Elspec Engineering Ltd's (TLV:ELSPC) price-to-earnings (or "P/E") ratio of 9.1x might 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 13x and even P/E's above 21x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

With earnings growth that's exceedingly strong of late, Elspec Engineering has been doing very well. 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 that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Elspec Engineering

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

Is There Any Growth For Elspec Engineering?

The only time you'd be truly comfortable seeing a P/E as low as Elspec Engineering's is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered an exceptional 90% gain to the company's bottom line. The latest three year period has also seen an excellent 195% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 23% shows it's noticeably more attractive on an annualised basis.

With this information, we find it odd that Elspec Engineering 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 Bottom Line On Elspec Engineering's P/E

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Elspec Engineering revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. 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.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Elspec Engineering (1 doesn't sit too well with us) you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.