Nahdi Medical Company's (TADAWUL:4164) Price Is Out Of Tune With Earnings

It's not a stretch to say that Nahdi Medical Company's (TADAWUL:4164) price-to-earnings (or "P/E") ratio of 23x right now seems quite "middle-of-the-road" compared to the market in Saudi Arabia, where the median P/E ratio is around 23x. 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.

Nahdi Medical 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 wane, which has kept the P/E from rising. 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.

See our latest analysis for Nahdi Medical

Keen to find out how analysts think Nahdi Medical's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Some Growth For Nahdi Medical?

The only time you'd be comfortable seeing a P/E like Nahdi Medical's is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered an exceptional 27% gain to the company's bottom line. Still, incredibly EPS has fallen 95% 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.

Shifting to the future, estimates from the three analysts covering the company suggest earnings growth is heading into negative territory, declining 9.4% over the next year. That's not great when the rest of the market is expected to grow by 20%.

In light of this, it's somewhat alarming that Nahdi Medical's P/E sits in line with 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 negative growth outlook.

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 Nahdi Medical currently trades on a higher than expected P/E for a company whose earnings are forecast to decline. When we see a poor outlook with earnings heading backwards, we suspect share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Nahdi Medical that you should be aware of.

If you're unsure about the strength of Nahdi Medical's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.