Nahdi Medical Company's (TADAWUL:4164) Share Price Is Matching Sentiment Around Its Earnings

Nahdi Medical Company's (TADAWUL:4164) price-to-earnings (or "P/E") ratio of 19.9x 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 26x and even P/E's above 45x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Nahdi Medical hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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Is There Any Growth For Nahdi Medical?

The only time you'd be truly comfortable seeing a P/E as low as Nahdi Medical's is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered a frustrating 3.0% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 41% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Looking ahead now, EPS is anticipated to climb by 5.0% per annum during the coming three years according to the seven analysts following the company. Meanwhile, the rest of the market is forecast to expand by 16% per year, which is noticeably more attractive.

In light of this, it's understandable that Nahdi Medical's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From Nahdi Medical's 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 Nahdi Medical maintains its low P/E on the weakness of its forecast growth being lower than the wider market, 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.

You always need to take note of risks, for example - Nahdi Medical has 1 warning sign we think you should be aware of.

If these risks are making you reconsider your opinion on Nahdi Medical, 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.