Abdullah Al-Othaim Markets Company's (TADAWUL:4001) Popularity With Investors Is Under Threat From Overpricing

With a median price-to-earnings (or "P/E") ratio of close to 28x in Saudi Arabia, you could be forgiven for feeling indifferent about Abdullah Al-Othaim Markets Company's (TADAWUL:4001) P/E ratio of 25.4x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

While the market has experienced earnings growth lately, Abdullah Al-Othaim Markets' earnings have gone into reverse gear, which is not great. One possibility is that the P/E is moderate because investors think this poor earnings performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

See our latest analysis for Abdullah Al-Othaim Markets

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Is There Some Growth For Abdullah Al-Othaim Markets?

The only time you'd be comfortable seeing a P/E like Abdullah Al-Othaim Markets' is when the company's growth is tracking the market closely.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 55%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 8.9% overall rise in EPS. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 10% per year during the coming three years according to the nine analysts following the company. With the market predicted to deliver 16% growth per annum, the company is positioned for a weaker earnings result.

In light of this, it's curious that Abdullah Al-Othaim Markets' P/E sits in line with the majority of other companies. 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

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Abdullah Al-Othaim Markets' analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Abdullah Al-Othaim Markets (of which 1 can't be ignored!) you should know about.

If these risks are making you reconsider your opinion on Abdullah Al-Othaim Markets, 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.