Fridenson Logistic Services Ltd's (TLV:FRDN) Share Price Not Quite Adding Up

With a price-to-earnings (or "P/E") ratio of 28.6x Fridenson Logistic Services Ltd (TLV:FRDN) may be sending very bearish signals at the moment, given that almost half of all companies in Israel have P/E ratios under 15x and even P/E's lower than 9x 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.

Recent times have been quite advantageous for Fridenson Logistic Services as its earnings have been rising very briskly. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Fridenson Logistic Services

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 Fridenson Logistic Services' earnings, revenue and cash flow.

How Is Fridenson Logistic Services' Growth Trending?

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

Retrospectively, the last year delivered an exceptional 267% gain to the company's bottom line. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 71% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 37% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we find it concerning that Fridenson Logistic Services is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Final Word

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.

Our examination of Fridenson Logistic Services revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, 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.

Plus, you should also learn about these 3 warning signs we've spotted with Fridenson Logistic Services (including 2 which make us uncomfortable).

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 P/E ratio below 20x).

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