Dubai Refreshment (P.J.S.C.) (DFM:DRC) Looks Just Right With A 36% Price Jump

Dubai Refreshment (P.J.S.C.) (DFM:DRC) shareholders would be excited to see that the share price has had a great month, posting a 36% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 33%.

After such a large jump in price, Dubai Refreshment (P.J.S.C.)'s price-to-earnings (or "P/E") ratio of 18.1x might make it look like a 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. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

As an illustration, earnings have deteriorated at Dubai Refreshment (P.J.S.C.) over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

Check out our latest analysis for Dubai Refreshment (P.J.S.C.)

Although there are no analyst estimates available for Dubai Refreshment (P.J.S.C.), take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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

The only time you'd be truly comfortable seeing a P/E as high as Dubai Refreshment (P.J.S.C.)'s is when the company's growth is on track to outshine the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 64%. Even so, admirably EPS has lifted 40% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

This is in contrast to the rest of the market, which is expected to grow by 8.2% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Dubai Refreshment (P.J.S.C.)'s P/E sits above the majority of other companies. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Final Word

The large bounce in Dubai Refreshment (P.J.S.C.)'s shares has lifted the company's P/E to a fairly high level. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Dubai Refreshment (P.J.S.C.) revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. 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.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Dubai Refreshment (P.J.S.C.) that you should be aware of.

Of course, you might also be able to find a better stock than Dubai Refreshment (P.J.S.C.). So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.