There's Reason For Concern Over Dubai Electricity and Water Authority (PJSC)'s (DFM:DEWA) Price

With a price-to-earnings (or "P/E") ratio of 18.9x Dubai Electricity and Water Authority (PJSC) (DFM:DEWA) may be sending very bearish signals at the moment, given that almost half of all companies in the United Arab Emirates have P/E ratios under 12x and even P/E's lower than 8x are not unusual. 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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Dubai Electricity and Water Authority (PJSC) hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

View 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).

How Is Dubai Electricity and Water Authority (PJSC)'s Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Dubai Electricity and Water Authority (PJSC)'s to be considered reasonable.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 3.6%. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Turning to the outlook, the next three years should generate growth of 6.0% per annum as estimated by the twelve analysts watching the company. That's shaping up to be materially lower than the 10.0% per annum growth forecast for the broader market.

In light of this, it's alarming that Dubai Electricity and Water Authority (PJSC)'s P/E sits above the majority of other companies. 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. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Dubai Electricity and Water Authority (PJSC)'s P/E?

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 Dubai Electricity and Water Authority (PJSC) currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive 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 you're unsure about the strength of Dubai Electricity and Water Authority (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.