Investors Still Aren't Entirely Convinced By Mediterranean Towers Ltd.'s (TLV:MDTR) Earnings Despite 26% Price Jump

The Mediterranean Towers Ltd. (TLV:MDTR) share price has done very well over the last month, posting an excellent gain of 26%. The last 30 days bring the annual gain to a very sharp 26%.

Although its price has surged higher, Mediterranean Towers' price-to-earnings (or "P/E") ratio of 7.4x 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 14x and even P/E's above 22x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Mediterranean Towers has been doing a good job lately as it's been growing earnings at a solid pace. It might be that many expect the respectable 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 Mediterranean Towers

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

How Is Mediterranean Towers' Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Mediterranean Towers' to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 18%. The strong recent performance means it was also able to grow EPS by 3,114% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 27% shows it's noticeably more attractive on an annualised basis.

In light of this, it's peculiar that Mediterranean Towers' P/E sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Final Word

Despite Mediterranean Towers' shares building up a head of steam, its P/E still lags most other companies. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Mediterranean Towers currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Mediterranean Towers (at least 1 which shouldn't be ignored), and understanding them should be part of your investment process.

Of course, you might also be able to find a better stock than Mediterranean Towers. 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.