Energix - Renewable Energies Ltd.'s (TLV:ENRG) 26% Price Boost Is Out Of Tune With Earnings

The Energix - Renewable Energies Ltd. (TLV:ENRG) share price has done very well over the last month, posting an excellent gain of 26%. Looking back a bit further, it's encouraging to see the stock is up 42% in the last year.

Since its price has surged higher, Energix - Renewable Energies may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 34.7x, 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. 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.

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Energix - Renewable Energies 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Energix - Renewable Energies

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 Energix - Renewable Energies' earnings, revenue and cash flow.

Does Growth Match The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Energix - Renewable Energies' to be considered reasonable.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 6.5% last year. Pleasingly, EPS has also lifted 65% in aggregate from three years ago, partly 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.

This is in contrast to the rest of the market, which is expected to grow by 23% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Energix - Renewable Energies is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Bottom Line On Energix - Renewable Energies' P/E

Energix - Renewable Energies' P/E is flying high just like its stock has during the last month. 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.

We've established that Energix - Renewable Energies currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you settle on your opinion, we've discovered 3 warning signs for Energix - Renewable Energies (2 are potentially serious!) that you should be aware of.

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

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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.