Electrical Industries Company's (TADAWUL:1303) P/E Is On The Mark

When close to half the companies in Saudi Arabia have price-to-earnings ratios (or "P/E's") below 20x, you may consider Electrical Industries Company (TADAWUL:1303) as a stock to potentially avoid with its 24.2x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

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Electrical Industries certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

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What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, Electrical Industries would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered an exceptional 46% gain to the company's bottom line. Pleasingly, EPS has also lifted 573% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 27% as estimated by the lone analyst watching the company. With the market only predicted to deliver 11%, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Electrical Industries' P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Electrical Industries' P/E?

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 Electrical Industries maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 1 warning sign for Electrical Industries you should be aware of.

If these risks are making you reconsider your opinion on Electrical Industries, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.