There's Reason For Concern Over Emsteel Building Materials PJSC's (ADX:EMSTEEL) Price

With a price-to-earnings (or "P/E") ratio of 17.4x Emsteel Building Materials PJSC (ADX:EMSTEEL) may be sending bearish signals at the moment, given that almost half of all companies in the United Arab Emirates have P/E ratios under 13x and even P/E's lower than 8x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

As an illustration, earnings have deteriorated at Emsteel Building Materials PJSC over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Emsteel Building Materials PJSC

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Emsteel Building Materials PJSC will help you shine a light on its historical performance.

Does Growth Match The High P/E?

Emsteel Building Materials 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, dishearteningly the company's profits fell to the tune of 2.9%. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 2.5% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that Emsteel Building Materials PJSC's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Key Takeaway

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Emsteel Building Materials PJSC currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Emsteel Building Materials PJSC with six simple checks will allow you to discover any risks that could be an issue.

You might be able to find a better investment than Emsteel Building Materials PJSC. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.