Some National Building and Marketing Co. (TADAWUL:9510) Shareholders Look For Exit As Shares Take 25% Pounding

The National Building and Marketing Co. (TADAWUL:9510) share price has fared very poorly over the last month, falling by a substantial 25%. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 53% loss during that time.

In spite of the heavy fall in price, National Building and Marketing's price-to-earnings (or "P/E") ratio of 33.8x might still make it look like a strong sell right now compared to the market in Saudi Arabia, where around half of the companies have P/E ratios below 20x and even P/E's below 13x 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 so lofty.

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With earnings growth that's exceedingly strong of late, National Building and Marketing has been doing very well. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for National Building and Marketing

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

How Is National Building and Marketing's Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like National Building and Marketing's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 89%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 54% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Comparing that to the market, which is predicted to deliver 11% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we find it concerning that National Building and Marketing 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. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Bottom Line On National Building and Marketing's P/E

Even after such a strong price drop, National Building and Marketing's P/E still exceeds the rest of the market significantly. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that National Building and Marketing currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It is also worth noting that we have found 3 warning signs for National Building and Marketing (2 shouldn't be ignored!) that you need to take into consideration.

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.