Victory Supermarket Chain Ltd's (TLV:VCTR) Shares Climb 27% But Its Business Is Yet to Catch Up

Victory Supermarket Chain Ltd (TLV:VCTR) shareholders have had their patience rewarded with a 27% share price jump in the last month. Notwithstanding the latest gain, the annual share price return of 3.3% isn't as impressive.

After such a large jump in price, Victory Supermarket Chain may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 27.3x, since almost half of all companies in Israel have P/E ratios under 15x and even P/E's lower than 11x 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.

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As an illustration, earnings have deteriorated at Victory Supermarket Chain over the last year, which is not ideal at all. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

View our latest analysis for Victory Supermarket Chain

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Victory Supermarket Chain will help you shine a light on its historical performance.

What Are Growth Metrics Telling Us About The High P/E?

Victory Supermarket Chain's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than 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 34%. This means it has also seen a slide in earnings over the longer-term as EPS is down 16% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 23% shows it's an unpleasant look.

In light of this, it's alarming that Victory Supermarket Chain's P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Bottom Line On Victory Supermarket Chain's P/E

Victory Supermarket Chain's P/E is flying high just like its stock has during the last month. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Victory Supermarket Chain 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.

You should always think about risks. Case in point, we've spotted 3 warning signs for Victory Supermarket Chain you should be aware of, and 1 of them doesn't sit too well with us.

You might be able to find a better investment than Victory Supermarket Chain. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.