Meshulam Levinstein Contracting & Engineering Ltd. (TLV:LEVI) Stock Rockets 26% As Investors Are Less Pessimistic Than Expected

The Meshulam Levinstein Contracting & Engineering Ltd. (TLV:LEVI) share price has done very well over the last month, posting an excellent gain of 26%. The last 30 days bring the annual gain to a very sharp 43%.

Following the firm bounce in price, given close to half the companies in Israel have price-to-earnings ratios (or "P/E's") below 12x, you may consider Meshulam Levinstein Contracting & Engineering as a stock to avoid entirely with its 24.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

For example, consider that Meshulam Levinstein Contracting & Engineering's financial performance has been poor lately as its earnings have been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Meshulam Levinstein Contracting & Engineering

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

Does Growth Match The High P/E?

In order to justify its P/E ratio, Meshulam Levinstein Contracting & Engineering would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a frustrating 67% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 22% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 29% shows it's an unpleasant look.

In light of this, it's alarming that Meshulam Levinstein Contracting & Engineering's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Key Takeaway

Shares in Meshulam Levinstein Contracting & Engineering have built up some good momentum lately, which has really inflated its P/E. 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 Meshulam Levinstein Contracting & Engineering revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Meshulam Levinstein Contracting & Engineering (of which 1 can't be ignored!) you should know about.

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.