Improved Earnings Required Before Abu Dhabi National Takaful Company PSC (ADX:TKFL) Stock's 32% Jump Looks Justified

Those holding Abu Dhabi National Takaful Company PSC (ADX:TKFL) shares would be relieved that the share price has rebounded 32% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. The last 30 days bring the annual gain to a very sharp 31%.

In spite of the firm bounce in price, Abu Dhabi National Takaful Company PSC's price-to-earnings (or "P/E") ratio of 6.7x might still make it look like a buy right now compared to the market in the United Arab Emirates, where around half of the companies have P/E ratios above 13x and even P/E's above 20x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

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For example, consider that Abu Dhabi National Takaful Company PSC's financial performance has been poor lately as its earnings have been in decline. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. 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 out of favour.

View 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.

Is There Any Growth For Abu Dhabi National Takaful Company PSC?

In order to justify its P/E ratio, Abu Dhabi National Takaful Company PSC would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a frustrating 25% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 12% in total over the last three years. 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 8.6% shows it's an unpleasant look.

In light of this, it's understandable that Abu Dhabi National Takaful Company PSC's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

The Final Word

Despite Abu Dhabi National Takaful Company PSC's shares building up a head of steam, its P/E still lags most other companies. 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.

As we suspected, our examination of Abu Dhabi National Takaful Company PSC revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Before you take the next step, you should know about the 2 warning signs for Abu Dhabi National Takaful Company PSC (1 is a bit concerning!) that we have uncovered.

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.