Investor Optimism Abounds Abu Dhabi National Energy Company PJSC (ADX:TAQA) But Growth Is Lacking

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 Abu Dhabi National Energy Company PJSC (ADX:TAQA) as a stock to avoid entirely with its 56.8x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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For instance, Abu Dhabi National Energy Company PJSC's receding earnings in recent times would have to be some food for thought. 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.

See our latest analysis for Abu Dhabi National Energy Company PJSC

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Abu Dhabi National Energy Company PJSC's earnings, revenue and cash flow.

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

The only time you'd be truly comfortable seeing a P/E as steep as Abu Dhabi National Energy Company PJSC's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a frustrating 9.6% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 15% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 10% shows it's an unpleasant look.

In light of this, it's alarming that Abu Dhabi National Energy Company PJSC's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Abu Dhabi National Energy Company PJSC currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

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.

You might be able to find a better investment than Abu Dhabi National Energy Company PJSC. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.