Subdued Growth No Barrier To I.B.I. Investment House Ltd (TLV:IBI) With Shares Advancing 29%

I.B.I. Investment House Ltd (TLV:IBI) shares have had a really impressive month, gaining 29% after a shaky period beforehand. The last month tops off a massive increase of 121% in the last year.

Since its price has surged higher, given around half the companies in Israel have price-to-earnings ratios (or "P/E's") below 14x, you may consider I.B.I. Investment House as a stock to potentially avoid with its 18x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Our free stock report includes 1 warning sign investors should be aware of before investing in I.B.I. Investment House. Read for free now.

I.B.I. Investment House has been doing a decent job lately as it's been growing earnings at a reasonable pace. It might be that many expect the reasonable earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for I.B.I. Investment House

Although there are no analyst estimates available for I.B.I. Investment House, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Does Growth Match The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like I.B.I. Investment House's to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 6.6%. EPS has also lifted 19% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 7.7% shows it's about the same on an annualised basis.

With this information, we find it interesting that I.B.I. Investment House is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average recent growth rates and are willing to pay up for exposure to the stock. Nevertheless, they may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Key Takeaway

The large bounce in I.B.I. Investment House's shares has lifted the company's P/E to a fairly high level. 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 I.B.I. Investment House revealed its three-year earnings trends aren't impacting its high P/E as much as we would have predicted, given they look similar to current market expectations. When we see average earnings with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 1 warning sign for I.B.I. Investment House that we have uncovered.

If you're unsure about the strength of I.B.I. Investment House's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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.