Some Shareholders Feeling Restless Over Aura Investments Ltd.'s (TLV:AURA) P/E Ratio

Aura Investments Ltd.'s (TLV:AURA) price-to-earnings (or "P/E") ratio of 22.9x 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 15x and even P/E's below 10x 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.

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As an illustration, earnings have deteriorated at Aura Investments over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

Check out our latest analysis for Aura Investments

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

How Is Aura Investments' Growth Trending?

There's an inherent assumption that a company should outperform the market for P/E ratios like Aura Investments' to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 5.6%. Even so, admirably EPS has lifted 50% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Comparing that to the market, which is predicted to deliver 22% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's alarming that Aura Investments' P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Aura Investments revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 3 warning signs for Aura Investments you should be aware of, and 1 of them can't be ignored.

If these risks are making you reconsider your opinion on Aura Investments, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.