Air Arabia PJSC (DFM:AIRARABIA) Investors Are Less Pessimistic Than Expected

With a median price-to-earnings (or "P/E") ratio of close to 13x in the United Arab Emirates, you could be forgiven for feeling indifferent about Air Arabia PJSC's (DFM:AIRARABIA) P/E ratio of 11.5x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

Recent times haven't been advantageous for Air Arabia PJSC as its earnings have been rising slower than most other companies. It might be that many expect the uninspiring earnings performance to strengthen positively, which has kept the P/E from falling. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

Check out our latest analysis for Air Arabia PJSC

Want the full picture on analyst estimates for the company? Then our free report on Air Arabia PJSC will help you uncover what's on the horizon.

Is There Some Growth For Air Arabia PJSC?

There's an inherent assumption that a company should be matching the market for P/E ratios like Air Arabia PJSC's to be considered reasonable.

Retrospectively, the last year delivered a decent 5.8% gain to the company's bottom line. Pleasingly, EPS has also lifted 57% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 3.1% each year over the next three years. With the market predicted to deliver 9.8% growth per year, the company is positioned for a weaker earnings result.

With this information, we find it interesting that Air Arabia PJSC is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Air Arabia PJSC's P/E?

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Air Arabia PJSC currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Before you settle on your opinion, we've discovered 1 warning sign for Air Arabia PJSC that you should be aware of.

If you're unsure about the strength of Air Arabia PJSC's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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.