Solrom Holdings Ltd's (TLV:SLRM) 30% Share Price Surge Not Quite Adding Up

Solrom Holdings Ltd (TLV:SLRM) shareholders would be excited to see that the share price has had a great month, posting a 30% gain and recovering from prior weakness. The last month tops off a massive increase of 105% in the last year.

Since its price has surged higher, Solrom Holdings may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 24.1x, since almost half of all companies in Israel have P/E ratios under 15x and even P/E's lower than 10x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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As an illustration, earnings have deteriorated at Solrom Holdings 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Solrom Holdings

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

Does Growth Match The High P/E?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 8.7%. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 13% shows it's noticeably less attractive on an annualised basis.

With this information, we find it concerning that Solrom Holdings is trading at a P/E higher than the market. 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

Shares in Solrom Holdings have built up some good momentum lately, which has really inflated its P/E. 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.

Our examination of Solrom Holdings 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. 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. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Solrom Holdings (2 are concerning!) that you should be aware of before investing here.

If you're unsure about the strength of Solrom Holdings' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.