Saudia Dairy & Foodstuff Company's (TADAWUL:2270) Low P/E No Reason For Excitement

With a price-to-earnings (or "P/E") ratio of 16.1x Saudia Dairy & Foodstuff Company (TADAWUL:2270) may be sending bullish signals at the moment, given that almost half of all companies in Saudi Arabia have P/E ratios greater than 20x and even P/E's higher than 37x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

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Saudia Dairy & Foodstuff could be doing better as it's been growing earnings less than most other companies lately. The P/E is probably low because investors think this lacklustre earnings performance isn't going to get any better. If you still like the company, you'd be hoping earnings don't get any worse and that you could pick up some stock while it's out of favour.

See our latest analysis for Saudia Dairy & Foodstuff

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

Saudia Dairy & Foodstuff'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, we see that the company managed to grow earnings per share by a handy 4.9% last year. Pleasingly, EPS has also lifted 104% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 0.03% each year during the coming three years according to the four analysts following the company. With the market predicted to deliver 12% growth per year, the company is positioned for a weaker earnings result.

In light of this, it's understandable that Saudia Dairy & Foodstuff's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From Saudia Dairy & Foodstuff's P/E?

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 Saudia Dairy & Foodstuff maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Saudia Dairy & Foodstuff (at least 1 which is potentially serious), and understanding these should be part of your investment process.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.