Gamla Harel Residential Real Estate Ltd's (TLV:GMLA) 56% Price Boost Is Out Of Tune With Earnings

The Gamla Harel Residential Real Estate Ltd (TLV:GMLA) share price has done very well over the last month, posting an excellent gain of 56%. Looking back a bit further, it's encouraging to see the stock is up 65% in the last year.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Gamla Harel Residential Real Estate's P/E ratio of 11.2x, since the median price-to-earnings (or "P/E") ratio in Israel is also close to 12x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Gamla Harel Residential Real Estate has been doing a good job lately as it's been growing earnings at a solid pace. It might be that many expect the respectable earnings performance to wane, which has kept the P/E from rising. If that doesn't eventuate, then existing shareholders probably aren't too pessimistic about the future direction of the share price.

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What Are Growth Metrics Telling Us About The P/E?

Gamla Harel Residential Real Estate's P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 8.4% last year. The solid recent performance means it was also able to grow EPS by 9.5% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 13% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's curious that Gamla Harel Residential Real Estate's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as a continuation of recent earnings trends is likely to weigh down the shares eventually.

The Bottom Line On Gamla Harel Residential Real Estate's P/E

Its shares have lifted substantially and now Gamla Harel Residential Real Estate's P/E is also back up to the market median. 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.

We've established that Gamla Harel Residential Real Estate currently trades on a higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are uncomfortable with the P/E as this earnings performance isn't likely to support a more positive sentiment for long. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Gamla Harel Residential Real Estate, and understanding them should be part of your investment process.

If you're unsure about the strength of Gamla Harel Residential Real Estate'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.