Eltek Ltd.'s (NASDAQ:ELTK) Shares Bounce 29% But Its Business Still Trails The Market
Despite an already strong run, Eltek Ltd. (NASDAQ:ELTK) shares have been powering on, with a gain of 29% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 50% in the last year.
In spite of the firm bounce in price, Eltek's price-to-earnings (or "P/E") ratio of 12.9x might still make it look like a buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 22x and even P/E's above 44x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
Eltek certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
View our latest analysis for Eltek
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 Eltek's earnings, revenue and cash flow.
Is There Any Growth For Eltek?
The only time you'd be truly comfortable seeing a P/E as low as Eltek's is when the company's growth is on track to lag the market.
If we review the last year of earnings growth, the company posted a terrific increase of 98%. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.
This is in contrast to the rest of the market, which is expected to grow by 18% over the next year, materially higher than the company's recent medium-term annualised growth rates.
With this information, we can see why Eltek is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.
The Bottom Line On Eltek's P/E
Eltek's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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 Eltek maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.
Before you settle on your opinion, we've discovered 2 warning signs for Eltek that you should be aware of.
If you're unsure about the strength of Eltek's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
This article by Simply Wall St is general in nature. 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.
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