Ghitha Holding P.J.S.C's (ADX:GHITHA) Shares May Have Run Too Fast Too Soon

When close to half the companies in the United Arab Emirates have price-to-earnings ratios (or "P/E's") below 14x, you may consider Ghitha Holding P.J.S.C (ADX:GHITHA) as a stock to avoid entirely with its 59x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's exceedingly strong of late, Ghitha Holding P.J.S.C 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 Ghitha Holding P.J.S.C

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 Ghitha Holding P.J.S.C's earnings, revenue and cash flow.

What Are Growth Metrics Telling Us About The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Ghitha Holding P.J.S.C's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 150%. 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 8.4% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that Ghitha Holding P.J.S.C's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

What We Can Learn From Ghitha Holding P.J.S.C's P/E?

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 Ghitha Holding P.J.S.C currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Ghitha Holding P.J.S.C (at least 1 which is significant), and understanding them should be part of your investment process.

If these risks are making you reconsider your opinion on Ghitha Holding P.J.S.C, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.