Risks To Shareholder Returns Are Elevated At These Prices For Islamic Arab Insurance Co. (Salama) PJSC (DFM:SALAMA)

When close to half the companies in the United Arab Emirates have price-to-earnings ratios (or "P/E's") below 15x, you may consider Islamic Arab Insurance Co. (Salama) PJSC (DFM:SALAMA) as a stock to avoid entirely with its 23.7x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

With earnings growth that's exceedingly strong of late, Islamic Arab Insurance (Salama) PJSC has been doing very well. 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

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 Islamic Arab Insurance (Salama) PJSC's earnings, revenue and cash flow.

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 very strong growth, and importantly, perform much better than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 129%. Still, incredibly EPS has fallen 84% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 4.2% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's alarming that Islamic Arab Insurance (Salama) PJSC's P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

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 Islamic Arab Insurance (Salama) 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.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Islamic Arab Insurance (Salama) PJSC that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.