Investors Aren't Entirely Convinced By Abu Dhabi National Takaful Company PSC's (ADX:TKFL) Earnings

Abu Dhabi National Takaful Company PSC's (ADX:TKFL) price-to-earnings (or "P/E") ratio of 5.1x might make it look like a strong buy right now compared to the market in the United Arab Emirates, where around half of the companies have P/E ratios above 14x and even P/E's above 22x 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 so limited.

With earnings growth that's exceedingly strong of late, Abu Dhabi National Takaful Company PSC has been doing very well. It might be that many expect the strong earnings performance to degrade substantially, 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.

See 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?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Abu Dhabi National Takaful Company PSC's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 51% last year. Pleasingly, EPS has also lifted 33% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 6.3% 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. It looks like most investors are not convinced the company can maintain its recent growth rates.

What We Can Learn From Abu Dhabi National Takaful Company PSC's P/E?

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 Abu Dhabi National Takaful Company PSC revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Abu Dhabi National Takaful Company PSC (1 is potentially serious!) that you need to be mindful of.

If you're unsure about the strength of Abu Dhabi National Takaful Company PSC's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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.