Why Investors Shouldn't Be Surprised By Emsteel Building Materials PJSC's (ADX:EMSTEEL) 90% Share Price Plunge

The Emsteel Building Materials PJSC (ADX:EMSTEEL) share price has fared very poorly over the last month, falling by a substantial 90%. For any long-term shareholders, the last month ends a year to forget by locking in a 91% share price decline.

Following the heavy fall in price, Emsteel Building Materials PJSC's price-to-earnings (or "P/E") ratio of 2.9x 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 21x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

For instance, Emsteel Building Materials PJSC's receding earnings in recent times would have to be some food for thought. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

Check out our latest analysis for Emsteel Building Materials PJSC

Although there are no analyst estimates available for Emsteel Building Materials PJSC, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Does Growth Match The Low P/E?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Emsteel Building Materials PJSC's to be considered reasonable.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 41%. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 2.7% shows it's noticeably less attractive on an annualised basis.

In light of this, it's understandable that Emsteel Building Materials PJSC's P/E sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Bottom Line On Emsteel Building Materials PJSC's P/E

Shares in Emsteel Building Materials PJSC have plummeted and its P/E is now low enough to touch the ground. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Emsteel Building Materials PJSC maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

It is also worth noting that we have found 1 warning sign for Emsteel Building Materials PJSC that you need to take into consideration.

If these risks are making you reconsider your opinion on Emsteel Building Materials PJSC, explore our interactive list of high quality stocks to get an idea of what else is out there.

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.