ADNOC Drilling Company P.J.S.C.'s (ADX:ADNOCDRILL) Business Is Yet to Catch Up With Its Share Price

When close to half the companies in the United Arab Emirates have price-to-earnings ratios (or "P/E's") below 12x, you may consider ADNOC Drilling Company P.J.S.C. (ADX:ADNOCDRILL) as a stock to potentially avoid with its 18x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

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ADNOC Drilling Company P.J.S.C certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for ADNOC Drilling Company P.J.S.C

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How Is ADNOC Drilling Company P.J.S.C's Growth Trending?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 23% last year. The strong recent performance means it was also able to grow EPS by 103% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 5.7% per year over the next three years. That's shaping up to be materially lower than the 8.9% each year growth forecast for the broader market.

With this information, we find it concerning that ADNOC Drilling Company P.J.S.C is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Bottom Line On ADNOC Drilling Company P.J.S.C's P/E

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of ADNOC Drilling Company P.J.S.C's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 1 warning sign for ADNOC Drilling Company P.J.S.C you should know about.

If you're unsure about the strength of ADNOC Drilling Company P.J.S.C's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.