Potential Upside For ADNOC Drilling Company P.J.S.C. (ADX:ADNOCDRILL) Not Without Risk

With a median price-to-earnings (or "P/E") ratio of close to 15x in the United Arab Emirates, you could be forgiven for feeling indifferent about ADNOC Drilling Company P.J.S.C.'s (ADX:ADNOCDRILL) P/E ratio of 16.8x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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 might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

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

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Does Growth Match The P/E?

In order to justify its P/E ratio, ADNOC Drilling Company P.J.S.C would need to produce growth that's similar to the market.

Retrospectively, the last year delivered an exceptional 29% gain to the company's bottom line. The latest three year period has also seen an excellent 82% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 9.2% per annum during the coming three years according to the eleven analysts following the company. That's shaping up to be materially higher than the 6.3% per annum growth forecast for the broader market.

In light of this, it's curious that ADNOC Drilling Company P.J.S.C's P/E sits in line with the majority of other companies. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Key Takeaway

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.

We've established that ADNOC Drilling Company P.J.S.C currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

Having said that, be aware ADNOC Drilling Company P.J.S.C is showing 2 warning signs in our investment analysis, you should know about.

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.