Shapir Engineering and Industry Ltd's (TLV:SPEN) Share Price Could Signal Some Risk

Explore Shapir Engineering and Industry's Fair Values from the Community and select yours

When close to half the companies in Israel have price-to-earnings ratios (or "P/E's") below 15x, you may consider Shapir Engineering and Industry Ltd (TLV:SPEN) as a stock to avoid entirely with its 57.7x 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.

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The earnings growth achieved at Shapir Engineering and Industry over the last year would be more than acceptable for most companies. It might be that many expect the respectable earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out 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?

Shapir Engineering and Industry's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 17% last year. Still, incredibly EPS has fallen 64% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 21% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's alarming that Shapir Engineering and Industry'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. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Final Word

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.

We've established that Shapir Engineering and Industry currently trades on a much 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 high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you settle on your opinion, we've discovered 3 warning signs for Shapir Engineering and Industry (2 are a bit concerning!) that you should be aware of.

If these risks are making you reconsider your opinion on Shapir Engineering and Industry, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.