Shagrir Group Vehicle Services Ltd's (TLV:SHGR) 28% Share Price Surge Not Quite Adding Up

Shagrir Group Vehicle Services Ltd (TLV:SHGR) shareholders have had their patience rewarded with a 28% share price jump in the last month. The annual gain comes to 103% following the latest surge, making investors sit up and take notice.

In spite of the firm bounce in price, it's still not a stretch to say that Shagrir Group Vehicle Services' price-to-earnings (or "P/E") ratio of 13.8x right now seems quite "middle-of-the-road" compared to the market in Israel, where the median P/E ratio is around 15x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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Shagrir Group Vehicle Services 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 wane, which has kept the P/E from rising. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

See our latest analysis for Shagrir Group Vehicle Services

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 Shagrir Group Vehicle Services' earnings, revenue and cash flow.

Is There Some Growth For Shagrir Group Vehicle Services?

The only time you'd be comfortable seeing a P/E like Shagrir Group Vehicle Services' is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered an exceptional 65% gain to the company's bottom line. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 10% shows it's noticeably less attractive on an annualised basis.

With this information, we find it interesting that Shagrir Group Vehicle Services is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. They may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Final Word

Its shares have lifted substantially and now Shagrir Group Vehicle Services' P/E is also back up to the market median. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of Shagrir Group Vehicle Services revealed its three-year earnings trends aren't impacting its P/E as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, 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.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Shagrir Group Vehicle Services (1 is a bit concerning) you should be aware of.

If these risks are making you reconsider your opinion on Shagrir Group Vehicle Services, 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.