Shapir Engineering and Industry Ltd's (TLV:SPEN) Business Is Yet to Catch Up With Its Share Price

Shapir Engineering and Industry Ltd's (TLV:SPEN) price-to-earnings (or "P/E") ratio of 54x might make it look like a strong sell right now compared to the market in Israel, where around half of the companies have P/E ratios below 11x and even P/E's below 7x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

For example, consider that Shapir Engineering and Industry'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.

See our latest analysis for Shapir Engineering and Industry

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

Is There Enough Growth For Shapir Engineering and Industry?

The only time you'd be truly comfortable seeing a P/E as steep as Shapir Engineering and Industry's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a frustrating 59% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 60% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

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 Shapir Engineering and Industry's P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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 Bottom Line On Shapir Engineering and Industry's P/E

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Shapir Engineering and Industry 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. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It is also worth noting that we have found 4 warning signs for Shapir Engineering and Industry (2 make us uncomfortable!) that you need to take into consideration.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com