Dubai Electricity and Water Authority (PJSC) (DFM:DEWA) Investors Are Less Pessimistic Than Expected

With a price-to-earnings (or "P/E") ratio of 18.1x Dubai Electricity and Water Authority (PJSC) (DFM:DEWA) may be sending bearish signals at the moment, given that almost half of all companies in the United Arab Emirates have P/E ratios under 13x and even P/E's lower than 9x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

While the market has experienced earnings growth lately, Dubai Electricity and Water Authority (PJSC)'s earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Dubai Electricity and Water Authority (PJSC)

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Dubai Electricity and Water Authority (PJSC).

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as high as Dubai Electricity and Water Authority (PJSC)'s is when the company's growth is on track to outshine the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 5.6%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 15% overall rise in EPS. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the seven analysts covering the company suggest earnings should grow by 6.4% per annum over the next three years. Meanwhile, the rest of the market is forecast to expand by 6.9% each year, which is not materially different.

In light of this, it's curious that Dubai Electricity and Water Authority (PJSC)'s P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Bottom Line On Dubai Electricity and Water Authority (PJSC)'s P/E

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Dubai Electricity and Water Authority (PJSC)'s analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Dubai Electricity and Water Authority (PJSC) with six simple checks will allow you to discover any risks that could be an issue.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.