Earnings Not Telling The Story For Azorim-Investment, Development & Construction Co. Ltd (TLV:AZRM) After Shares Rise 31%

The Azorim-Investment, Development & Construction Co. Ltd (TLV:AZRM) share price has done very well over the last month, posting an excellent gain of 31%. Looking back a bit further, it's encouraging to see the stock is up 50% in the last year.

Since its price has surged higher, given close to half the companies in Israel have price-to-earnings ratios (or "P/E's") below 15x, you may consider Azorim-Investment Development & Construction as a stock to avoid entirely with its 27.7x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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For example, consider that Azorim-Investment Development & Construction'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 Azorim-Investment Development & Construction

Although there are no analyst estimates available for Azorim-Investment Development & Construction, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Azorim-Investment Development & Construction's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Azorim-Investment Development & Construction's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a frustrating 5.7% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 53% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

In contrast to the company, the rest of the market is expected to grow by 9.1% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's alarming that Azorim-Investment Development & Construction'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 Bottom Line On Azorim-Investment Development & Construction's P/E

The strong share price surge has got Azorim-Investment Development & Construction's P/E rushing to great heights as well. 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 Azorim-Investment Development & Construction 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.

Having said that, be aware Azorim-Investment Development & Construction is showing 2 warning signs in our investment analysis, and 1 of those is a bit concerning.

If you're unsure about the strength of Azorim-Investment Development & Construction's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.