Why Investors Shouldn't Be Surprised By Qualitau Ltd's (TLV:QLTU) 26% Share Price Surge

Qualitau Ltd (TLV:QLTU) shares have continued their recent momentum with a 26% gain in the last month alone. The last month tops off a massive increase of 154% in the last year.

After such a large jump in price, Qualitau's price-to-earnings (or "P/E") ratio of 16.6x 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 11x and even P/E's below 7x 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.

Qualitau has been doing a decent job lately as it's been growing earnings at a reasonable pace. One possibility is that the P/E is high because investors think this good earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for Qualitau

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

How Is Qualitau's Growth Trending?

In order to justify its P/E ratio, Qualitau would need to produce impressive growth in excess of the market.

If we review the last year of earnings growth, the company posted a worthy increase of 5.0%. This was backed up an excellent period prior to see EPS up by 338% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 23% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Qualitau's P/E sits above the majority of other companies. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Bottom Line On Qualitau's P/E

Qualitau shares have received a push in the right direction, but its P/E is elevated too. 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 Qualitau revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

Plus, you should also learn about these 2 warning signs we've spotted with Qualitau.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.