National Corporation for Tourism and Hotels' (ADX:NCTH) 29% Price Boost Is Out Of Tune With Earnings

National Corporation for Tourism and Hotels (ADX:NCTH) shares have had a really impressive month, gaining 29% after a shaky period beforehand. Taking a wider view, although not as strong as the last month, the full year gain of 22% is also fairly reasonable.

Since its price has surged higher, National Corporation for Tourism and Hotels may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 42.7x, since almost half of all companies in the United Arab Emirates have P/E ratios under 15x and even P/E's lower than 8x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

As an illustration, earnings have deteriorated at National Corporation for Tourism and Hotels 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for National Corporation for Tourism and Hotels

Although there are no analyst estimates available for National Corporation for Tourism and Hotels, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is National Corporation for Tourism and Hotels' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as National Corporation for Tourism and Hotels' is when the company's growth is on track to outshine the market decidedly.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 3.7%. This means it has also seen a slide in earnings over the longer-term as EPS is down 44% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 2.7% shows it's an unpleasant look.

In light of this, it's alarming that National Corporation for Tourism and Hotels' P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

Shares in National Corporation for Tourism and Hotels 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.

Our examination of National Corporation for Tourism and Hotels revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

We don't want to rain on the parade too much, but we did also find 3 warning signs for National Corporation for Tourism and Hotels (2 make us uncomfortable!) that you need to be mindful of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.