Alwasail Industrial Company (TADAWUL:9525) Soars 25% But It's A Story Of Risk Vs Reward

Alwasail Industrial Company (TADAWUL:9525) shareholders would be excited to see that the share price has had a great month, posting a 25% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 36% in the last year.

In spite of the firm bounce in price, Alwasail Industrial's price-to-earnings (or "P/E") ratio of 16.2x might still 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 25x and even P/E's above 43x 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 limited.

Alwasail Industrial has been doing a good job lately as it's been growing earnings at a solid pace. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

View our latest analysis for Alwasail Industrial

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

How Is Alwasail Industrial's Growth Trending?

Alwasail Industrial's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 19%. Pleasingly, EPS has also lifted 62% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

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

With this information, we find it odd that Alwasail Industrial is trading at a P/E lower than the market. It may be that most investors are not convinced the company can maintain recent growth rates.

What We Can Learn From Alwasail Industrial's P/E?

Alwasail Industrial's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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.

Our examination of Alwasail Industrial revealed its three-year earnings trends aren't contributing to its P/E as much as we would have predicted, given they look similar to current market expectations. When we see average earnings with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued if recent medium-term earnings trends continue, but investors seem to think future earnings could see some volatility.

Having said that, be aware Alwasail Industrial is showing 3 warning signs in our investment analysis, and 1 of those doesn't sit too well with us.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.