Saudi Tadawul Group Holding Company's (TADAWUL:1111) Share Price Could Signal Some Risk

Saudi Tadawul Group Holding Company's (TADAWUL:1111) price-to-earnings (or "P/E") ratio of 44.6x might make it look like a strong sell right now compared to the market in Saudi Arabia, where around half of the companies have P/E ratios below 23x and even P/E's below 16x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, Saudi Tadawul Group Holding has been doing relatively well. 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 Tadawul Group Holding

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

Is There Enough Growth For Saudi Tadawul Group Holding?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Saudi Tadawul Group Holding's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 68% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 5.3% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 15% during the coming year according to the five analysts following the company. With the market predicted to deliver 17% growth , the company is positioned for a comparable earnings result.

In light of this, it's curious that Saudi Tadawul Group Holding's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

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.

Our examination of Saudi Tadawul Group Holding's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Saudi Tadawul Group Holding with six simple checks will allow you to discover any risks that could be an issue.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.