Investor Optimism Abounds Tamar Petroleum Ltd (TLV:TMRP) But Growth Is Lacking

When close to half the companies in Israel have price-to-earnings ratios (or "P/E's") below 14x, you may consider Tamar Petroleum Ltd (TLV:TMRP) as a stock to potentially avoid with its 19.7x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

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For instance, Tamar Petroleum's receding earnings in recent times would have to be some food for thought. 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 Tamar Petroleum

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 Tamar Petroleum's earnings, revenue and cash flow.

Is There Enough Growth For Tamar Petroleum?

In order to justify its P/E ratio, Tamar Petroleum would need to produce impressive growth in excess of the market.

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 3.1%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 17% overall rise in EPS. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 21% shows it's noticeably less attractive on an annualised basis.

With this information, we find it concerning that Tamar Petroleum is trading at a P/E higher than the market. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Bottom Line On Tamar Petroleum's P/E

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.

Our examination of Tamar Petroleum revealed its three-year earnings trends aren't impacting its high P/E anywhere near 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 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.

Plus, you should also learn about these 3 warning signs we've spotted with Tamar Petroleum (including 1 which doesn't sit too well with us).

If these risks are making you reconsider your opinion on Tamar Petroleum, 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.