Saudi Arabian Oil Company's (TADAWUL:2222) Share Price Is Matching Sentiment Around Its Earnings

Saudi Arabian Oil Company's (TADAWUL:2222) price-to-earnings (or "P/E") ratio of 16.4x 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 23x and even P/E's above 41x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

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Saudi Arabian Oil could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. 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.

See our latest analysis for Saudi Arabian Oil

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

In order to justify its P/E ratio, Saudi Arabian Oil would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a frustrating 13% decrease to the company's bottom line. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, EPS is anticipated to climb by 2.4% per annum during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to expand by 13% per year, which is noticeably more attractive.

In light of this, it's understandable that Saudi Arabian Oil'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.

The Bottom Line On Saudi Arabian Oil's P/E

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Saudi Arabian Oil's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Plus, you should also learn about this 1 warning sign we've spotted with Saudi Arabian Oil .

You might be able to find a better investment than Saudi Arabian Oil. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.