There's Reason For Concern Over Top Ramdor Systems & Computers Co. (1990) Ltd's (TLV:TOPS) Price

When close to half the companies in Israel have price-to-earnings ratios (or "P/E's") below 11x, you may consider Top Ramdor Systems & Computers Co. (1990) Ltd (TLV:TOPS) as a stock to potentially avoid with its 14.7x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

For example, consider that Top Ramdor Systems & Computers (1990)'s financial performance has been poor lately as its earnings have been in decline. 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.

See our latest analysis for Top Ramdor Systems & Computers (1990)

Although there are no analyst estimates available for Top Ramdor Systems & Computers (1990), take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Enough Growth For Top Ramdor Systems & Computers (1990)?

In order to justify its P/E ratio, Top Ramdor Systems & Computers (1990) would need to produce impressive growth in excess of the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 29%. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 30% in total. So we can start by confirming that the company has generally done a 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.

With this information, we find it concerning that Top Ramdor Systems & Computers (1990) is trading at a P/E higher than the market. 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. 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.

What We Can Learn From Top Ramdor Systems & Computers (1990)'s P/E?

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Top Ramdor Systems & Computers (1990) 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 5 warning signs with Top Ramdor Systems & Computers (1990) (at least 2 which don't sit too well with us), and understanding these should be part of your investment process.

Of course, you might also be able to find a better stock than Top Ramdor Systems & Computers (1990). So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.