Further Upside For Abu Dhabi National Takaful Company PSC (ADX:TKFL) Shares Could Introduce Price Risks After 27% Bounce

Abu Dhabi National Takaful Company PSC (ADX:TKFL) shares have continued their recent momentum with a 27% gain in the last month alone. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 32% in the last twelve months.

Although its price has surged higher, Abu Dhabi National Takaful Company PSC may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 5.7x, since almost half of all companies in the United Arab Emirates have P/E ratios greater than 14x and even P/E's higher than 21x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's exceedingly strong of late, Abu Dhabi National Takaful Company PSC has been doing very well. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Abu Dhabi National Takaful Company PSC

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Abu Dhabi National Takaful Company PSC's earnings, revenue and cash flow.

How Is Abu Dhabi National Takaful Company PSC's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as depressed as Abu Dhabi National Takaful Company PSC's is when the company's growth is on track to lag the market decidedly.

If we review the last year of earnings growth, the company posted a terrific increase of 88%. As a result, it also grew EPS by 24% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 2.2% shows it's noticeably more attractive on an annualised basis.

With this information, we find it odd that Abu Dhabi National Takaful Company PSC is trading at a P/E lower than the market. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Bottom Line On Abu Dhabi National Takaful Company PSC's P/E

Shares in Abu Dhabi National Takaful Company PSC are going to need a lot more upward momentum to get the company's P/E out of its slump. 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 Abu Dhabi National Takaful Company PSC currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

Before you settle on your opinion, we've discovered 2 warning signs for Abu Dhabi National Takaful Company PSC (1 is concerning!) that you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.