Why Investors Shouldn't Be Surprised By NextVision Stabilized Systems, Ltd.'s (TLV:NXSN) 29% Share Price Surge

The NextVision Stabilized Systems, Ltd. (TLV:NXSN) share price has done very well over the last month, posting an excellent gain of 29%. The last month tops off a massive increase of 280% in the last year.

After such a large jump in price, NextVision Stabilized Systems may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 62.1x, 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. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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NextVision Stabilized Systems certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for NextVision Stabilized Systems

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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 NextVision Stabilized Systems' to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 48% last year. Pleasingly, EPS has also lifted 833% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 26% over the next year. With the market only predicted to deliver 23%, the company is positioned for a stronger earnings result.

With this information, we can see why NextVision Stabilized Systems is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From NextVision Stabilized Systems' P/E?

Shares in NextVision Stabilized Systems have built up some good momentum lately, which has really inflated its P/E. 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 NextVision Stabilized Systems maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for NextVision Stabilized Systems that you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.