Unpleasant Surprises Could Be In Store For Saudi Marketing Company's (TADAWUL:4006) Shares

Saudi Marketing Company's (TADAWUL:4006) price-to-earnings (or "P/E") ratio of 44.2x might make it look like a sell right now compared to the market in Saudi Arabia, where around half of the companies have P/E ratios below 30x and even P/E's below 22x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Saudi Marketing certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Saudi Marketing

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

Is There Enough Growth For Saudi Marketing?

The only time you'd be truly comfortable seeing a P/E as high as Saudi Marketing's is when the company's growth is on track to outshine the market.

If we review the last year of earnings growth, the company posted a terrific increase of 274%. Pleasingly, EPS has also lifted 476% 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.

Shifting to the future, estimates from the twin analysts covering the company suggest earnings should grow by 11% over the next year. Meanwhile, the rest of the market is forecast to expand by 14%, which is noticeably more attractive.

In light of this, it's alarming that Saudi Marketing's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Saudi Marketing's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It is also worth noting that we have found 1 warning sign for Saudi Marketing that you need to take into consideration.

You might be able to find a better investment than Saudi Marketing. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).

When trading Saudi Marketing or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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