Abdullah Al-Othaim Markets Company's (TADAWUL:4001) Prospects Need A Boost To Lift Shares

Abdullah Al-Othaim Markets Company's (TADAWUL:4001) price-to-earnings (or "P/E") ratio of 14.3x might 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 21x and even P/E's above 36x 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.

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

Abdullah Al-Othaim Markets certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Abdullah Al-Othaim Markets

Want the full picture on analyst estimates for the company? Then our free report on Abdullah Al-Othaim Markets will help you uncover what's on the horizon.

How Is Abdullah Al-Othaim Markets' Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Abdullah Al-Othaim Markets' to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 27% last year. EPS has also lifted 29% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 5.8% per annum as estimated by the ten analysts watching the company. Meanwhile, the broader market is forecast to expand by 12% each year, which paints a poor picture.

With this information, we are not surprised that Abdullah Al-Othaim Markets is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Bottom Line On Abdullah Al-Othaim Markets' P/E

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.

We've established that Abdullah Al-Othaim Markets maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Having said that, be aware Abdullah Al-Othaim Markets is showing 2 warning signs in our investment analysis, and 1 of those is a bit concerning.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.