Energix - Renewable Energies Ltd. (TLV:ENRG) shareholders have had their patience rewarded with a 26% share price jump in the last month. Unfortunately, despite the strong performance over the last month, the full year gain of 2.8% isn't as attractive.
Since its price has surged higher, Energix - Renewable Energies' price-to-earnings (or "P/E") ratio of 24.6x might make it look like a strong sell right now compared to the market in Israel, where around half of the companies have P/E ratios below 16x and even P/E's below 10x 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 so lofty.
Energix - Renewable Energies certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. 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.
Check out our latest analysis for Energix - Renewable Energies
What Are Growth Metrics Telling Us About The High P/E?
In order to justify its P/E ratio, Energix - Renewable Energies would need to produce outstanding growth well in excess of the market.
Retrospectively, the last year delivered an exceptional 77% gain to the company's bottom line. Pleasingly, EPS has also lifted 155% 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.
Comparing that to the market, which is only predicted to deliver 9.8% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.
In light of this, it's understandable that Energix - Renewable Energies' 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 Final Word
Energix - Renewable Energies' P/E is flying high just like its stock has during the last month. 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 Energix - Renewable Energies maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, as expected. 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 3 warning signs we've spotted with Energix - Renewable Energies (including 2 which are a bit concerning).
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 low P/E).
Valuation is complex, but we're here to simplify it.
Discover if Energix - Renewable Energies might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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