Investor Optimism Abounds Riyadh Cables Group Company (TADAWUL:4142) But Growth Is Lacking

There wouldn't be many who think Riyadh Cables Group Company's (TADAWUL:4142) price-to-earnings (or "P/E") ratio of 23.5x is worth a mention when the median P/E in Saudi Arabia is similar at about 23x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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Recent times have been advantageous for Riyadh Cables Group as its earnings have been rising faster than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. 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 not quite in favour.

See our latest analysis for Riyadh Cables Group

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Riyadh Cables Group .

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

In order to justify its P/E ratio, Riyadh Cables Group would need to produce growth that's similar to the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 58% last year. The strong recent performance means it was also able to grow EPS by 241% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 3.3% per year during the coming three years according to the three analysts following the company. With the market predicted to deliver 13% growth each year, the company is positioned for a weaker earnings result.

With this information, we find it interesting that Riyadh Cables Group is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Final Word

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Riyadh Cables Group currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Riyadh Cables Group , and understanding these should be part of your investment process.

If these risks are making you reconsider your opinion on Riyadh Cables Group, 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.