There's Reason For Concern Over Mesaieed Petrochemical Holding Company Q.P.S.C.'s (DSM:MPHC) Price

With a price-to-earnings (or "P/E") ratio of 22.9x Mesaieed Petrochemical Holding Company Q.P.S.C. (DSM:MPHC) may be sending very bearish signals at the moment, given that almost half of all companies in Qatar have P/E ratios under 12x and even P/E's lower than 10x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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As an illustration, earnings have deteriorated at Mesaieed Petrochemical Holding Company Q.P.S.C over the last year, which is not ideal at all. 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 Mesaieed Petrochemical Holding Company Q.P.S.C

Although there are no analyst estimates available for Mesaieed Petrochemical Holding Company Q.P.S.C, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Mesaieed Petrochemical Holding Company Q.P.S.C's Growth Trending?

In order to justify its P/E ratio, Mesaieed Petrochemical Holding Company Q.P.S.C would need to produce outstanding growth well in excess of the market.

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 16%. As a result, earnings from three years ago have also fallen 65% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

In contrast to the company, the rest of the market is expected to grow by 13% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that Mesaieed Petrochemical Holding Company Q.P.S.C is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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 Final Word

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.

We've established that Mesaieed Petrochemical Holding Company Q.P.S.C 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.

You should always think about risks. Case in point, we've spotted 2 warning signs for Mesaieed Petrochemical Holding Company Q.P.S.C you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.