Golan Renewable Industries Ltd's (TLV:GRIN) 26% Share Price Plunge Could Signal Some Risk

The Golan Renewable Industries Ltd (TLV:GRIN) share price has fared very poorly over the last month, falling by a substantial 26%. Looking back over the past twelve months the stock has been a solid performer regardless, with a gain of 18%.

Even after such a large drop in price, you could still be forgiven for feeling indifferent about Golan Renewable Industries' P/E ratio of 13.9x, since the median price-to-earnings (or "P/E") ratio in Israel is also close to 13x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

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For example, consider that Golan Renewable Industries' financial performance has been poor lately as its earnings have been in decline. It might be that many expect the company to put the disappointing earnings performance behind them over the coming period, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for Golan Renewable Industries

Although there are no analyst estimates available for Golan Renewable Industries, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Golan Renewable Industries' Growth Trending?

There's an inherent assumption that a company should be matching the market for P/E ratios like Golan Renewable Industries' to be considered reasonable.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 26%. This means it has also seen a slide in earnings over the longer-term as EPS is down 37% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 30% shows it's an unpleasant look.

With this information, we find it concerning that Golan Renewable Industries is trading at a fairly similar P/E to the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh on the share price eventually.

The Key Takeaway

With its share price falling into a hole, the P/E for Golan Renewable Industries looks quite average now. 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 Golan Renewable Industries currently trades on a higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the moderate P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You should always think about risks. Case in point, we've spotted 3 warning signs for Golan Renewable Industries you should be aware of, and 1 of them shouldn't be ignored.

Of course, you might also be able to find a better stock than Golan Renewable Industries. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.