A Piece Of The Puzzle Missing From RSL Electronics Ltd.'s (TLV:RSEL) 52% Share Price Climb

Despite an already strong run, RSL Electronics Ltd. (TLV:RSEL) shares have been powering on, with a gain of 52% in the last thirty days. The annual gain comes to 185% following the latest surge, making investors sit up and take notice.

Even after such a large jump in price, RSL Electronics may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 12.1x, since almost half of all companies in Israel have P/E ratios greater than 15x and even P/E's higher than 22x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

RSL Electronics certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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.

See our latest analysis for RSL Electronics

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on RSL Electronics' earnings, revenue and cash flow.

What Are Growth Metrics Telling Us About The Low P/E?

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

Retrospectively, the last year delivered an exceptional 173% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 5,939% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 23% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we find it odd that RSL Electronics is trading at a P/E lower than the market. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Bottom Line On RSL Electronics' P/E

Despite RSL Electronics' shares building up a head of steam, its P/E still lags most other companies. 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 RSL Electronics 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.

There are also other vital risk factors to consider and we've discovered 4 warning signs for RSL Electronics (1 is concerning!) that you should be aware of before investing here.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.