Insufficient Growth At Rabigh Refining and Petrochemical Company (TADAWUL:2380) Hampers Share Price

When close to half the companies in Saudi Arabia have price-to-earnings ratios (or "P/E's") above 27x, you may consider Rabigh Refining and Petrochemical Company (TADAWUL:2380) as a highly attractive investment with its 11x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

Rabigh Refining and Petrochemical certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Rabigh Refining and Petrochemical

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Rabigh Refining and Petrochemical.

Does Growth Match The Low P/E?

Rabigh Refining and Petrochemical's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Retrospectively, the last year delivered an exceptional 240% gain to the company's bottom line. Pleasingly, EPS has also lifted 1,589% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 27% per annum during the coming three years according to the three analysts following the company. With the market predicted to deliver 14% growth per year, that's a disappointing outcome.

With this information, we are not surprised that Rabigh Refining and Petrochemical is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

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.

We've established that Rabigh Refining and Petrochemical maintains its low P/E on the weakness of its forecast for sliding earnings, 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. It's hard to see the share price rising strongly in the near future under these circumstances.

Plus, you should also learn about these 4 warning signs we've spotted with Rabigh Refining and Petrochemical (including 2 which shouldn't be ignored).

If you're unsure about the strength of Rabigh Refining and Petrochemical'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.