Some Shareholders Feeling Restless Over Al-Dawaa Medical Services Company's (TADAWUL:4163) P/E Ratio

It's not a stretch to say that Al-Dawaa Medical Services Company's (TADAWUL:4163) price-to-earnings (or "P/E") ratio of 21.4x right now seems quite "middle-of-the-road" compared to the market in Saudi Arabia, where the median P/E ratio is around 24x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Recent times have been advantageous for Al-Dawaa Medical Services as its earnings have been rising faster than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

Check out our latest analysis for Al-Dawaa Medical Services

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Does Growth Match The P/E?

In order to justify its P/E ratio, Al-Dawaa Medical Services would need to produce growth that's similar to the market.

If we review the last year of earnings growth, the company posted a terrific increase of 35%. Still, incredibly EPS has fallen 100% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 29% as estimated by the lone analyst watching the company. That's not great when the rest of the market is expected to grow by 14%.

With this information, we find it concerning that Al-Dawaa Medical Services is trading at a fairly similar P/E to the market. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh on the share price eventually.

The Key Takeaway

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 Al-Dawaa Medical Services currently trades on a higher than expected P/E for a company whose earnings are forecast to decline. Right now we are uncomfortable with the P/E as the predicted future earnings are unlikely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

You need to take note of risks, for example - Al-Dawaa Medical Services has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

If these risks are making you reconsider your opinion on Al-Dawaa Medical Services, 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.