Even With A 27% Surge, Cautious Investors Are Not Rewarding Elspec Engineering Ltd's (TLV:ELSPC) Performance Completely

Elspec Engineering Ltd (TLV:ELSPC) shareholders have had their patience rewarded with a 27% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 58%.

Although its price has surged higher, there still wouldn't be many who think Elspec Engineering's price-to-earnings (or "P/E") ratio of 13.6x is worth a mention when the median P/E in Israel is similar at about 15x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Recent times have been quite advantageous for Elspec Engineering as its earnings have been rising very briskly. The P/E is probably moderate because investors think this strong earnings growth might not be enough to outperform 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 not quite in favour.

See 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 Some Growth For Elspec Engineering?

The only time you'd be comfortable seeing a P/E like Elspec Engineering's is when the company's growth is tracking the market closely.

If we review the last year of earnings growth, the company posted a terrific increase of 90%. The strong recent performance means it was also able to grow EPS by 195% in total over the last three years. 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 23% 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 interesting that Elspec Engineering is trading at a fairly similar P/E to the market. It may be that most investors are not convinced the company can maintain its recent growth rates.

The Key Takeaway

Its shares have lifted substantially and now Elspec Engineering's P/E is also back up to the market median. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Elspec Engineering currently trades on a 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 pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Elspec Engineering (1 is a bit concerning!) that you should be aware of before investing here.

If you're unsure about the strength of Elspec Engineering's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.