Neto M.E Holdings Ltd's (TLV:NTO) Price Is Right But Growth Is Lacking After Shares Rocket 25%

Neto M.E Holdings Ltd (TLV:NTO) shares have continued their recent momentum with a 25% gain in the last month alone. The annual gain comes to 210% following the latest surge, making investors sit up and take notice.

Even after such a large jump in price, Neto M.E Holdings' price-to-earnings (or "P/E") ratio of 8.3x might still make it look like a buy right now compared to the market in Israel, where around half of the companies have P/E ratios above 16x and even P/E's above 25x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

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With earnings growth that's exceedingly strong of late, Neto M.E Holdings has been doing very well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Neto M.E Holdings

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

Does Growth Match The Low P/E?

Neto M.E Holdings' P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 92%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 3.2% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

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 understandable that Neto M.E Holdings' P/E would sit below the majority of other companies. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Key Takeaway

Neto M.E Holdings' stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Neto M.E Holdings 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.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Neto M.E Holdings (1 shouldn't be ignored!) that you should be aware of before investing here.

If you're unsure about the strength of Neto M.E Holdings' 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.