Why We're Not Concerned Yet About Saudi Tadawul Group Holding Company's (TADAWUL:1111) 28% Share Price Plunge

Saudi Tadawul Group Holding Company (TADAWUL:1111) shareholders that were waiting for something to happen have been dealt a blow with a 28% share price drop in the last month. To make matters worse, the recent drop has wiped out a year's worth of gains with the share price now back where it started a year ago.

In spite of the heavy fall in price, given close to half the companies in Saudi Arabia have price-to-earnings ratios (or "P/E's") below 24x, you may still consider Saudi Tadawul Group Holding as a stock to avoid entirely with its 40.3x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Saudi Tadawul Group Holding could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Our analysis indicates that 1111 is potentially overvalued!

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

What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, Saudi Tadawul Group Holding would need to produce outstanding growth well in excess of the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 24%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 212% 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.

Turning to the outlook, the next three years should generate growth of 21% each year as estimated by the four analysts watching the company. With the market only predicted to deliver 17% per year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Saudi Tadawul Group Holding's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Saudi Tadawul Group Holding's P/E?

Saudi Tadawul Group Holding's shares may have retreated, but its P/E is still flying high. 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.

As we suspected, our examination of Saudi Tadawul Group Holding's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Saudi Tadawul Group Holding you should know about.

Of course, you might also be able to find a better stock than Saudi Tadawul Group Holding. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.

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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.