Earnings Not Telling The Story For Riyadh Cables Group Company (TADAWUL:4142) After Shares Rise 27%

Riyadh Cables Group Company (TADAWUL:4142) shares have had a really impressive month, gaining 27% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 67% in the last year.

Since its price has surged higher, Riyadh Cables Group's price-to-earnings (or "P/E") ratio of 28x might make it look like a sell right now compared to the market in Saudi Arabia, where around half of the companies have P/E ratios below 23x and even P/E's below 15x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

With earnings growth that's superior to most other companies of late, Riyadh Cables Group has been doing relatively well. 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.

See our latest analysis for Riyadh Cables Group

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

The only time you'd be truly comfortable seeing a P/E as high as Riyadh Cables Group's is when the company's growth is on track to outshine the market.

If we review the last year of earnings growth, the company posted a terrific increase of 43%. The strong recent performance means it was also able to grow EPS by 192% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 8.9% per annum as estimated by the five analysts watching the company. With the market predicted to deliver 15% growth per year, the company is positioned for a weaker earnings result.

With this information, we find it concerning that Riyadh Cables Group is trading at a P/E higher than the market. 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.

The Key Takeaway

Riyadh Cables Group shares have received a push in the right direction, but its P/E is elevated too. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Riyadh Cables Group 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. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Having said that, be aware Riyadh Cables Group is showing 2 warning signs in our investment analysis, you should know about.

You might be able to find a better investment than Riyadh Cables Group. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.