Unpleasant Surprises Could Be In Store For Y.H. Dimri Construction & Development Ltd's (TLV:DIMRI) Shares

When close to half the companies in Israel have price-to-earnings ratios (or "P/E's") below 11x, you may consider Y.H. Dimri Construction & Development Ltd (TLV:DIMRI) as a stock to avoid entirely with its 28.1x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

For instance, Y.H. Dimri Construction & Development's receding earnings in recent times would have to be some food for thought. 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.

View our latest analysis for Y.H. Dimri Construction & Development

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Y.H. Dimri Construction & Development's earnings, revenue and cash flow.

How Is Y.H. Dimri Construction & Development's Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Y.H. Dimri Construction & Development's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 62%. Even so, admirably EPS has lifted 39% 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.

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 Y.H. Dimri Construction & Development's 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. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Final Word

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Y.H. Dimri Construction & Development currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market 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 significant risk and potential investors in danger of paying an excessive premium.

Having said that, be aware Y.H. Dimri Construction & Development is showing 2 warning signs in our investment analysis, and 1 of those doesn't sit too well with us.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.