Investor Optimism Abounds ADNOC Drilling Company P.J.S.C. (ADX:ADNOCDRILL) But Growth Is Lacking

ADNOC Drilling Company P.J.S.C.'s (ADX:ADNOCDRILL) price-to-earnings (or "P/E") ratio of 22.4x 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 15x and even P/E's below 9x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for ADNOC Drilling Company P.J.S.C as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

Keen to find out how analysts think ADNOC Drilling Company P.J.S.C's future stacks up against the industry? In that case, our free report is a great place to start.

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 27% last year. Still, incredibly EPS has fallen 2.4% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 7.6% per annum as estimated by the seven analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 9.8% per annum, which is noticeably more attractive.

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. 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 growth outlook.

The Key Takeaway

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.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for ADNOC Drilling Company P.J.S.C with six simple checks will allow you to discover any risks that could be an issue.

You might be able to find a better investment than ADNOC Drilling Company P.J.S.C. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).

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.