Middle East Specialized Cables Company (TADAWUL:2370) Might Not Be As Mispriced As It Looks

Middle East Specialized Cables Company's (TADAWUL:2370) price-to-earnings (or "P/E") ratio of 21.3x might make it look like a buy right now compared to the market in Saudi Arabia, where around half of the companies have P/E ratios above 26x and even P/E's above 45x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Middle East Specialized Cables certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Check out our latest analysis for Middle East Specialized Cables

Although there are no analyst estimates available for Middle East Specialized Cables, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Middle East Specialized Cables' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as Middle East Specialized Cables' is when the company's growth is on track to lag the market.

If we review the last year of earnings growth, the company posted a terrific increase of 189%. The latest three year period has also seen an excellent 962% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 19% shows it's noticeably more attractive on an annualised basis.

With this information, we find it odd that Middle East Specialized Cables is trading at a P/E lower than the market. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Key Takeaway

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 Middle East Specialized Cables currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

You should always think about risks. Case in point, we've spotted 1 warning sign for Middle East Specialized Cables you should be aware of.

If you're unsure about the strength of Middle East Specialized Cables' 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.