Abu Dhabi National Energy Company PJSC's (ADX:TAQA) Share Price Not Quite Adding Up

When close to half the companies in the United Arab Emirates have price-to-earnings ratios (or "P/E's") below 15x, you may consider Abu Dhabi National Energy Company PJSC (ADX:TAQA) as a stock to potentially avoid with its 22.4x P/E ratio. 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.

Abu Dhabi National Energy Company PJSC certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Abu Dhabi National Energy Company PJSC

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Abu Dhabi National Energy Company PJSC.

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

There's an inherent assumption that a company should outperform the market for P/E ratios like Abu Dhabi National Energy Company PJSC's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 102%. The strong recent performance means it was also able to grow EPS by 385% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 16% per annum as estimated by the two analysts watching the company. Meanwhile, the broader market is forecast to expand by 4.9% per annum, which paints a poor picture.

With this information, we find it concerning that Abu Dhabi National Energy Company PJSC is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh heavily on the share price eventually.

The Key Takeaway

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Abu Dhabi National Energy Company PJSC's analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a poor outlook with earnings heading backwards, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Abu Dhabi National Energy Company PJSC (1 is a bit concerning!) that you need to be mindful of.

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

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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.