Islamic Arab Insurance Co. (Salama) PJSC's (DFM:SALAMA) Popularity With Investors Is Clear

Islamic Arab Insurance Co. (Salama) PJSC's (DFM:SALAMA) price-to-earnings (or "P/E") ratio of 14.7x might make it look like a sell right now compared to the market in the United Arab Emirates, where around half of the companies have P/E ratios below 11x and even P/E's below 6x 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 lofty.

Islamic Arab Insurance (Salama) PJSC certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Islamic Arab Insurance (Salama) PJSC

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Islamic Arab Insurance (Salama) PJSC will help you shine a light on its historical performance.

Does Growth Match The High P/E?

Islamic Arab Insurance (Salama) PJSC's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 126%. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Comparing that to the market, which is predicted to shrink 12% in the next 12 months, the company's positive momentum based on recent medium-term earnings results is a bright spot for the moment.

With this information, we can see why Islamic Arab Insurance (Salama) PJSC is trading at a high P/E compared to the market. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse. However, its current earnings trajectory will be very difficult to maintain against the headwinds other companies are facing at the moment.

The Bottom Line On Islamic Arab Insurance (Salama) PJSC's P/E

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 Islamic Arab Insurance (Salama) PJSC revealed its growing earnings over the medium-term are contributing to its high P/E, given the market is set to shrink. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Our only concern is whether its earnings trajectory can keep outperforming under these tough market conditions. Otherwise, it's hard to see the share price falling strongly in the near future if its earnings performance persists.

It is also worth noting that we have found 1 warning sign for Islamic Arab Insurance (Salama) PJSC that you need to take into consideration.

If these risks are making you reconsider your opinion on Islamic Arab Insurance (Salama) PJSC, explore our interactive list of high quality stocks to get an idea of what else is out there.

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