Arabian Drilling Company's (TADAWUL:2381) Business And Shares Still Trailing The Market

When close to half the companies in Saudi Arabia have price-to-earnings ratios (or "P/E's") above 24x, you may consider Arabian Drilling Company (TADAWUL:2381) as an attractive investment with its 20.7x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Arabian Drilling hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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How Is Arabian Drilling's Growth Trending?

Arabian Drilling's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than 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 23%. Even so, admirably EPS has lifted 43% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 4.1% as estimated by the eight analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 16%, which is noticeably more attractive.

With this information, we can see why Arabian Drilling is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

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 Arabian Drilling 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. It's hard to see the share price rising strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Arabian Drilling that you should be aware of.

Of course, you might also be able to find a better stock than Arabian Drilling. So you may wish to see this free collection of other companies that have reasonable P/E ratios 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.