Arad Investment & Industrial Development Ltd. (TLV:ARAD) Surges 31% Yet Its Low P/E Is No Reason For Excitement

Arad Investment & Industrial Development Ltd. (TLV:ARAD) shareholders are no doubt pleased to see that the share price has bounced 31% in the last month, although it is still struggling to make up recently lost ground. Still, the 30-day jump doesn’t change the fact that longer term shareholders have seen their stock decimated by the 74% share price drop in the last twelve months.

Even after such a large jump in price, Arad Investment & Industrial Development may still be sending very bullish signals at the moment with its price-to-earnings (or “P/E”) ratio of 2.5x, since almost half of all companies in Israel have P/E ratios greater than 13x and even P/E’s higher than 21x 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 limited.

As an illustration, earnings have deteriorated at Arad Investment & Industrial Development over the last year, which is not ideal at all. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. However, if this doesn’t eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

See our latest analysis for Arad Investment & Industrial Development

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Arad Investment & Industrial Development will help you shine a light on its historical performance.

How Is Arad Investment & Industrial Development’s Growth Trending?

There’s an inherent assumption that a company should far underperform the market for P/E ratios like Arad Investment & Industrial Development’s to be considered reasonable.

Retrospectively, the last year delivered a frustrating 46% decrease to the company’s bottom line. As a result, earnings from three years ago have also fallen 8.8% overall. 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 17% shows it’s an unpleasant look.

In light of this, it’s understandable that Arad Investment & Industrial Development’s P/E would sit below the majority of other companies. Nonetheless, there’s no guarantee the P/E has reached a floor yet with earnings going in reverse. There’s potential for the P/E to fall to even lower levels if the company doesn’t improve its profitability.

The Key Takeaway

Shares in Arad Investment & Industrial Development are going to need a lot more upward momentum to get the company’s P/E out of its slump. Typically, we’d caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We’ve established that Arad Investment & Industrial Development maintains its low P/E on the weakness of its sliding earnings over the medium-term, as expected. At this stage investors feel the potential for an improvement in earnings isn’t great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Before you settle on your opinion, we’ve discovered 5 warning signs for Arad Investment & Industrial Development (2 can’t be ignored!) that you should be aware of.

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.

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.