Why We're Not Concerned About Abu Dhabi National Energy Company PJSC's (ADX:TAQA) Share Price

Abu Dhabi National Energy Company PJSC's (ADX:TAQA) price-to-earnings (or "P/E") ratio of 50.6x might make it look like a strong sell right now compared to the market in the United Arab Emirates, where around half of the companies have P/E ratios below 12x and even P/E's below 8x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

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Abu Dhabi National Energy Company PJSC hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

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How Is Abu Dhabi National Energy Company PJSC's Growth Trending?

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

Retrospectively, the last year delivered a frustrating 58% decrease to the company's bottom line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 23% overall rise in EPS. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Shifting to the future, estimates from the lone analyst covering the company suggest earnings should grow by 21% per annum over the next three years. Meanwhile, the rest of the market is forecast to only expand by 6.9% per year, which is noticeably less attractive.

With this information, we can see why Abu Dhabi National Energy Company PJSC is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Abu Dhabi National Energy Company PJSC's P/E

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Abu Dhabi National Energy Company PJSC's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Abu Dhabi National Energy Company PJSC that you need to be mindful of.

Of course, you might also be able to find a better stock than Abu Dhabi National Energy 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.