Strauss Group Ltd.'s (TLV:STRS) Shares May Have Run Too Fast Too Soon

When close to half the companies in Israel have price-to-earnings ratios (or "P/E's") below 14x, you may consider Strauss Group Ltd. (TLV:STRS) as a stock to avoid entirely with its 25.3x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

For example, consider that Strauss Group's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

Check out our latest analysis for Strauss Group

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Strauss Group will help you shine a light on its historical performance.

How Is Strauss Group's Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Strauss Group's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 4.4%. This means it has also seen a slide in earnings over the longer-term as EPS is down 45% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 23% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's alarming that Strauss Group's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

What We Can Learn From Strauss Group'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.

Our examination of Strauss Group revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It is also worth noting that we have found 3 warning signs for Strauss Group (2 don't sit too well with us!) that you need to take into consideration.

If these risks are making you reconsider your opinion on Strauss Group, 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.