Abu Dhabi National Energy Company PJSC (ADX:TAQA) Stocks Shoot Up 26% But Its P/E Still Looks Reasonable

Abu Dhabi National Energy Company PJSC (ADX:TAQA) shares have had a really impressive month, gaining 26% after a shaky period beforehand. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 8.0% over the last year.

Following the firm bounce in price, Abu Dhabi National Energy Company PJSC may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 48.3x, since 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. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

As an illustration, earnings have deteriorated at Abu Dhabi National Energy Company PJSC over the last year, which is not ideal at all. One possibility is that the P/E is high because investors think the company will still do 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.

Check out our latest analysis for Abu Dhabi National Energy Company PJSC

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Abu Dhabi National Energy Company PJSC will help you shine a light on its historical performance.

Is There Enough Growth For Abu Dhabi National Energy Company PJSC?

In order to justify its P/E ratio, Abu Dhabi National Energy Company PJSC would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a frustrating 55% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 46% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Comparing that to the market, which is only predicted to deliver 2.8% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.

In light of this, it's understandable that Abu Dhabi National Energy Company PJSC's P/E sits above the majority of other companies. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Key Takeaway

The strong share price surge has got Abu Dhabi National Energy Company PJSC's P/E rushing to great heights as well. 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 Abu Dhabi National Energy Company PJSC maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 2 warning signs for Abu Dhabi National Energy Company 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).

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.