Direct Finance of Direct Group (2006)Ltd's (TLV:DIFI) Price Is Out Of Tune With Earnings

With a median price-to-earnings (or "P/E") ratio of close to 14x in Israel, you could be forgiven for feeling indifferent about Direct Finance of Direct Group (2006)Ltd's (TLV:DIFI) P/E ratio of 15.3x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

For instance, Direct Finance of Direct Group (2006)Ltd's receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is moderate because investors think the company might still do enough to be in line with the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for Direct Finance of Direct Group (2006)Ltd

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 Direct Finance of Direct Group (2006)Ltd's earnings, revenue and cash flow.

Does Growth Match The P/E?

The only time you'd be comfortable seeing a P/E like Direct Finance of Direct Group (2006)Ltd's is when the company's growth is tracking the market closely.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 34%. The last three years don't look nice either as the company has shrunk EPS by 47% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 32% shows it's an unpleasant look.

In light of this, it's somewhat alarming that Direct Finance of Direct Group (2006)Ltd's P/E sits in line with the majority of other companies. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh on the share price eventually.

What We Can Learn From Direct Finance of Direct Group (2006)Ltd's P/E?

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.

We've established that Direct Finance of Direct Group (2006)Ltd currently trades on a higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are uncomfortable with the P/E as this earnings performance is unlikely to support a more positive sentiment for long. 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 2 warning signs for Direct Finance of Direct Group (2006)Ltd (1 is a bit unpleasant) you should be aware of.

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.