Alpha Dhabi Holding PJSC's (ADX:ALPHADHABI) Share Price Could Signal Some Risk

With a median price-to-earnings (or "P/E") ratio of close to 13x in the United Arab Emirates, you could be forgiven for feeling indifferent about Alpha Dhabi Holding PJSC's (ADX:ALPHADHABI) P/E ratio of 13x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Alpha Dhabi Holding PJSC could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is moderate because investors think this poor earnings performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.

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Is There Some Growth For Alpha Dhabi Holding PJSC?

In order to justify its P/E ratio, Alpha Dhabi Holding PJSC would need to produce growth that's similar to the market.

Retrospectively, the last year delivered a frustrating 17% decrease to the company's bottom line. Even so, admirably EPS has lifted 282% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to slump, contracting by 13% each year during the coming three years according to the one analyst following the company. Meanwhile, the broader market is forecast to expand by 7.3% per annum, which paints a poor picture.

In light of this, it's somewhat alarming that Alpha Dhabi Holding PJSC's P/E sits in line with the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.

What We Can Learn From Alpha Dhabi Holding PJSC's 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 Alpha Dhabi Holding PJSC currently trades on a higher than expected P/E for a company whose earnings are forecast to decline. When we see a poor outlook with earnings heading backwards, we suspect 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.

Before you settle on your opinion, we've discovered 3 warning signs for Alpha Dhabi Holding PJSC (1 is a bit unpleasant!) that you should be aware of.

Of course, you might also be able to find a better stock than Alpha Dhabi Holding PJSC. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.