Ilex Medical Ltd's (TLV:ILX) 26% Share Price Surge Not Quite Adding Up

The Ilex Medical Ltd (TLV:ILX) share price has done very well over the last month, posting an excellent gain of 26%. Looking back a bit further, it's encouraging to see the stock is up 48% in the last year.

Since its price has surged higher, Ilex Medical's price-to-earnings (or "P/E") ratio of 18.2x might make it look like a sell right now compared to the market in Israel, where around half of the companies have P/E ratios below 13x and even P/E's below 8x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

As an illustration, earnings have deteriorated at Ilex Medical over the last year, which is not ideal at all. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Ilex Medical

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

How Is Ilex Medical's Growth Trending?

Ilex Medical's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Retrospectively, the last year delivered a frustrating 34% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 66% overall. 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 33% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that Ilex Medical is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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 Ilex Medical's P/E?

Ilex Medical shares have received a push in the right direction, but its P/E is elevated too. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Ilex Medical currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Ilex Medical (1 is concerning) you should be aware of.

Of course, you might also be able to find a better stock than Ilex Medical. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.