Risks To Shareholder Returns Are Elevated At These Prices For Saudia Dairy & Foodstuff Company (TADAWUL:2270)

When close to half the companies in Saudi Arabia have price-to-earnings ratios (or "P/E's") below 24x, you may consider Saudia Dairy & Foodstuff Company (TADAWUL:2270) as a stock to potentially avoid with its 26.9x 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 as high as it is.

Recent times have been advantageous for Saudia Dairy & Foodstuff as its earnings have been rising faster than most other companies. 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.

See our latest analysis for Saudia Dairy & Foodstuff

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Saudia Dairy & Foodstuff.

Is There Enough Growth For Saudia Dairy & Foodstuff?

The only time you'd be truly comfortable seeing a P/E as high as Saudia Dairy & Foodstuff's is when the company's growth is on track to outshine the market.

If we review the last year of earnings growth, the company posted a terrific increase of 54%. Pleasingly, EPS has also lifted 38% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 12% per year over the next three years. Meanwhile, the rest of the market is forecast to expand by 16% each year, which is noticeably more attractive.

In light of this, it's alarming that Saudia Dairy & Foodstuff's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Saudia Dairy & Foodstuff currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Saudia Dairy & Foodstuff with six simple checks.

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.