Investors Don't See Light At End Of Meitav Investment House Ltd's (TLV:MTAV) Tunnel

With a price-to-earnings (or "P/E") ratio of 10.3x Meitav Investment House Ltd (TLV:MTAV) may be sending bullish signals at the moment, given that almost half of all companies in Israel have P/E ratios greater than 14x and even P/E's higher than 22x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Meitav Investment House 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 degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for Meitav Investment House

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

How Is Meitav Investment House's Growth Trending?

In order to justify its P/E ratio, Meitav Investment House would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered an exceptional 70% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 16% drop in EPS in aggregate. 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 26% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's understandable that Meitav Investment House's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Meitav Investment House revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Meitav Investment House (at least 1 which is a bit unpleasant), and understanding them should be part of your investment process.

If you're unsure about the strength of Meitav Investment House'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.