What Almarai Company's (TADAWUL:2280) P/E Is Not Telling You

With a median price-to-earnings (or "P/E") ratio of close to 28x in Saudi Arabia, you could be forgiven for feeling indifferent about Almarai Company's (TADAWUL:2280) P/E ratio of 28.3x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Almarai certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

See our latest analysis for Almarai

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

Does Growth Match The P/E?

There's an inherent assumption that a company should be matching the market for P/E ratios like Almarai's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 16% last year. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 12% per year during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to expand by 17% per year, which is noticeably more attractive.

In light of this, it's curious that Almarai's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Final Word

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Almarai currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Almarai that you should be aware of.

You might be able to find a better investment than Almarai. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.