TopGum Industries Ltd.'s (TLV:TPGM) 26% Share Price Surge Not Quite Adding Up

TopGum Industries Ltd. (TLV:TPGM) shareholders have had their patience rewarded with a 26% share price jump in the last month. Looking further back, the 18% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Following the firm bounce in price, TopGum Industries may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 62x, since almost half of all companies in Israel have P/E ratios under 14x and even P/E's lower than 9x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

TopGum Industries certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for TopGum Industries

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

Is There Enough Growth For TopGum Industries?

In order to justify its P/E ratio, TopGum Industries would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 53%. The latest three year period has also seen an excellent 93% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

It's interesting to note that the rest of the market is similarly expected to grow by 23% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.

In light of this, it's curious that TopGum Industries' P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average recent growth rates and are willing to pay up for exposure to the stock. Nevertheless, they may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Key Takeaway

TopGum Industries' P/E is flying high just like its stock has during the last month. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of TopGum Industries revealed its three-year earnings trends aren't impacting its high P/E as much as we would have predicted, given they look similar to current market expectations. When we see average earnings with market-like 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 risk and potential investors in danger of paying an unnecessary premium.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for TopGum Industries with six simple checks on some of these key factors.

If you're unsure about the strength of TopGum Industries' 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.