Abu Dhabi Ship Building PJSC's (ADX:ADSB) 41% Jump Shows Its Popularity With Investors

The Abu Dhabi Ship Building PJSC (ADX:ADSB) share price has done very well over the last month, posting an excellent gain of 41%. The annual gain comes to 120% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, Abu Dhabi Ship Building PJSC's price-to-earnings (or "P/E") ratio of 27x might make it look like a strong sell right now compared to the market in the United Arab Emirates, where around half of the companies have P/E ratios below 12x and even P/E's below 8x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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With earnings growth that's exceedingly strong of late, Abu Dhabi Ship Building PJSC has been doing very well. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Abu Dhabi Ship Building PJSC

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Abu Dhabi Ship Building PJSC will help you shine a light on its historical performance.

How Is Abu Dhabi Ship Building PJSC's Growth Trending?

In order to justify its P/E ratio, Abu Dhabi Ship Building PJSC would need to produce outstanding growth well in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 37% last year. Pleasingly, EPS has also lifted 130% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 7.3% shows it's noticeably more attractive on an annualised basis.

With this information, we can see why Abu Dhabi Ship Building PJSC is trading at such a high P/E compared to the market. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse.

The Final Word

Shares in Abu Dhabi Ship Building PJSC have built up some good momentum lately, which has really inflated its P/E. 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.

We've established that Abu Dhabi Ship Building PJSC maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, 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. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Abu Dhabi Ship Building PJSC that you need to be mindful of.

You might be able to find a better investment than Abu Dhabi Ship Building PJSC. 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.