RADA Electronic Industries Ltd.'s (NASDAQ:DRS) price-to-earnings (or "P/E") ratio of 6.6x might make it look like a strong buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 15x and even P/E's above 29x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.
With earnings growth that's exceedingly strong of late, RADA Electronic Industries has been doing very well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.
View our latest analysis for RADA Electronic Industries
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 RADA Electronic Industries' earnings, revenue and cash flow.
Is There Any Growth For RADA Electronic Industries?
There's an inherent assumption that a company should far underperform the market for P/E ratios like RADA Electronic Industries' to be considered reasonable.
If we review the last year of earnings growth, the company posted a terrific increase of 178%. The strong recent performance means it was also able to grow EPS by 196% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
This is in contrast to the rest of the market, which is expected to grow by 7.4% over the next year, materially lower than the company's recent medium-term annualised growth rates.
With this information, we find it odd that RADA Electronic Industries is trading at a P/E lower than the market. It looks like most investors are not convinced the company can maintain its recent growth rates.
The Final Word
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
Our examination of RADA Electronic Industries revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.
It is also worth noting that we have found 2 warning signs for RADA Electronic Industries that you need to take into consideration.
If you're unsure about the strength of RADA Electronic Industries' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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.
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