What Bonei Hatichon Civil Engineering & Infrastructures Ltd.'s (TLV:BOTI) 26% Share Price Gain Is Not Telling You

Bonei Hatichon Civil Engineering & Infrastructures Ltd. (TLV:BOTI) shareholders have had their patience rewarded with a 26% share price jump in the last month. Unfortunately, despite the strong performance over the last month, the full year gain of 6.8% isn't as attractive.

After such a large jump in price, given close to half the companies in Israel have price-to-earnings ratios (or "P/E's") below 10x, you may consider Bonei Hatichon Civil Engineering & Infrastructures as a stock to avoid entirely with its 24.7x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

As an illustration, earnings have deteriorated at Bonei Hatichon Civil Engineering & Infrastructures over the last year, which is not ideal at all. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

The only time you'd be truly comfortable seeing a P/E as steep as Bonei Hatichon Civil Engineering & Infrastructures' is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a frustrating 73% decrease to the company's bottom line. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 22% shows it's noticeably less attractive on an annualised basis.

In light of this, it's alarming that Bonei Hatichon Civil Engineering & Infrastructures' P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates 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 heavily on the share price eventually.

The Key Takeaway

Bonei Hatichon Civil Engineering & Infrastructures' P/E is flying high just like its stock has during the last month. 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 Bonei Hatichon Civil Engineering & Infrastructures currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. 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.

Before you take the next step, you should know about the 4 warning signs for Bonei Hatichon Civil Engineering & Infrastructures (2 shouldn't be ignored!) that we have uncovered.

If these risks are making you reconsider your opinion on Bonei Hatichon Civil Engineering & Infrastructures, 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.