Why Investors Shouldn't Be Surprised By AFI Properties Ltd.'s (TLV:AFPR) Low P/E

When close to half the companies in Israel have price-to-earnings ratios (or "P/E's") above 16x, you may consider AFI Properties Ltd. (TLV:AFPR) as an attractive investment with its 11.6x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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With earnings growth that's exceedingly strong of late, AFI Properties has been doing very well. It might be that many expect the strong 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.

See our latest analysis for AFI Properties

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

Is There Any Growth For AFI Properties?

The only time you'd be truly comfortable seeing a P/E as low as AFI Properties' is when the company's growth is on track to lag the market.

If we review the last year of earnings growth, the company posted a terrific increase of 92%. Still, incredibly EPS has fallen 37% in total from three years ago, which is quite disappointing. 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 22% shows it's an unpleasant look.

In light of this, it's understandable that AFI Properties' P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Key Takeaway

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.

As we suspected, our examination of AFI Properties revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 2 warning signs for AFI Properties you should be aware of, and 1 of them is a bit concerning.

Of course, you might also be able to find a better stock than AFI Properties. 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.