Unpleasant Surprises Could Be In Store For Emirates Integrated Telecommunications Company PJSC's (DFM:DU) Shares

When close to half the companies in the United Arab Emirates have price-to-earnings ratios (or "P/E's") below 11x, you may consider Emirates Integrated Telecommunications Company PJSC (DFM:DU) as a stock to potentially avoid with its 15.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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Recent times have been advantageous for Emirates Integrated Telecommunications Company PJSC as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Emirates Integrated Telecommunications Company PJSC

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What Are Growth Metrics Telling Us About The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like Emirates Integrated Telecommunications Company PJSC's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 20% last year. The latest three year period has also seen an excellent 121% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 6.5% per annum as estimated by the nine analysts watching the company. That's shaping up to be similar to the 6.4% per annum growth forecast for the broader market.

With this information, we find it interesting that Emirates Integrated Telecommunications Company PJSC is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Bottom Line On Emirates Integrated Telecommunications Company PJSC'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.

We've established that Emirates Integrated Telecommunications Company PJSC currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Emirates Integrated Telecommunications Company PJSC you should know about.

Of course, you might also be able to find a better stock than Emirates Integrated Telecommunications Company PJSC. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.