Eltek Ltd. (NASDAQ:ELTK) Stocks Shoot Up 35% But Its P/E Still Looks Reasonable

Despite an already strong run, Eltek Ltd. (NASDAQ:ELTK) shares have been powering on, with a gain of 35% in the last thirty days. The last 30 days were the cherry on top of the stock's 328% gain in the last year, which is nothing short of spectacular.

Since its price has surged higher, Eltek may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 19.5x, since almost half of all companies in the United States have P/E ratios under 16x 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 elevated P/E.

With earnings that are retreating more than the market's of late, Eltek has been very sluggish. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.

Check out our latest analysis for Eltek

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Eltek.

How Is Eltek's Growth Trending?

In order to justify its P/E ratio, Eltek would need to produce impressive growth in excess of the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 7.0%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 95% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 21% over the next year. With the market only predicted to deliver 10%, the company is positioned for a stronger earnings result.

With this information, we can see why Eltek is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Eltek's P/E

The large bounce in Eltek's shares has lifted the company's P/E to a fairly high level. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Eltek maintains its high P/E on the strength of its forecast growth being higher than the wider market, 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. It's hard to see the share price falling strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 1 warning sign for Eltek that you should be aware of.

If these risks are making you reconsider your opinion on Eltek, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.