Market Participants Recognise Elbit Systems Ltd.'s (TLV:ESLT) Earnings Pushing Shares 25% Higher

Elbit Systems Ltd. (TLV:ESLT) shareholders would be excited to see that the share price has had a great month, posting a 25% gain and recovering from prior weakness. The annual gain comes to 103% following the latest surge, making investors sit up and take notice.

After such a large jump in price, Elbit Systems may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 63.2x, since almost half of all companies in Israel have P/E ratios under 16x 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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Recent times have been advantageous for Elbit Systems as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Elbit Systems

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

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 Elbit Systems' to be considered reasonable.

Retrospectively, the last year delivered an exceptional 72% gain to the company's bottom line. The latest three year period has also seen an excellent 119% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 31% during the coming year according to the four analysts following the company. That's shaping up to be materially higher than the 23% growth forecast for the broader market.

In light of this, it's understandable that Elbit Systems' P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Elbit Systems' P/E

The strong share price surge has got Elbit Systems' P/E rushing to great heights as well. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Elbit Systems 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. Unless these conditions change, they will continue to provide strong support to the share price.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Elbit Systems with six simple checks will allow you to discover any risks that could be an issue.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.