Seach Medical Group Ltd's (TLV:SEMG) Share Price Not Quite Adding Up

By
Simply Wall St
Published
May 13, 2022
TASE:SEMG
Source: Shutterstock

With a median price-to-earnings (or "P/E") ratio of close to 12x in Israel, you could be forgiven for feeling indifferent about Seach Medical Group Ltd's (TLV:SEMG) P/E ratio of 13.5x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

As an illustration, earnings have deteriorated at Seach Medical Group over the last year, which is not ideal at all. One possibility is that the P/E is moderate because investors think the company might still do enough to be in line with the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for Seach Medical Group

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TASE:SEMG Price Based on Past Earnings May 13th 2022
Although there are no analyst estimates available for Seach Medical Group, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

What Are Growth Metrics Telling Us About The P/E?

In order to justify its P/E ratio, Seach Medical Group would need to produce growth that's similar to the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 44%. This means it has also seen a slide in earnings over the longer-term as EPS is down 44% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 30% shows it's an unpleasant look.

In light of this, it's somewhat alarming that Seach Medical Group's P/E sits in line with the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh on the share price eventually.

What We Can Learn From Seach Medical Group's P/E?

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.

We've established that Seach Medical Group currently trades on a higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are uncomfortable with the P/E as this earnings performance is unlikely to support a more positive sentiment for long. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 4 warning signs for Seach Medical Group you should be aware of, and 1 of them is a bit unpleasant.

You might be able to find a better investment than Seach Medical Group. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).

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