With a price-to-earnings (or "P/E") ratio of 79.5x Al Wathba National Insurance Company PJSC (ADX:AWNIC) may be sending very bearish signals at the moment, given that almost half of all companies in the United Arab Emirates have P/E ratios under 12x and even P/E's lower than 7x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
Recent times have been quite advantageous for Al Wathba National Insurance Company PJSC as its earnings have been rising very briskly. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.
How Is Al Wathba National Insurance Company PJSC's Growth Trending?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Al Wathba National Insurance Company PJSC's to be considered reasonable.
If we review the last year of earnings growth, the company posted a terrific increase of 204%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 80% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 24% shows it's an unpleasant look.
In light of this, it's alarming that Al Wathba National Insurance Company PJSC's 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 Final Word
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.
Our examination of Al Wathba National Insurance Company PJSC 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. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.
It is also worth noting that we have found 4 warning signs for Al Wathba National Insurance Company PJSC (2 are a bit unpleasant!) that you need to take into consideration.
If these risks are making you reconsider your opinion on Al Wathba National Insurance Company PJSC, explore our interactive list of high quality stocks to get an idea of what else is out there.
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