Subdued Growth No Barrier To Saudia Dairy & Foodstuff Company's (TADAWUL:2270) Price

There wouldn't be many who think Saudia Dairy & Foodstuff Company's (TADAWUL:2270) price-to-earnings (or "P/E") ratio of 27.6x is worth a mention when the median P/E in Saudi Arabia is similar at about 28x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Recent times have been advantageous for Saudia Dairy & Foodstuff as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

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.

Does Growth Match The P/E?

The only time you'd be comfortable seeing a P/E like Saudia Dairy & Foodstuff's is when the company's growth is tracking the market closely.

Taking a look back first, we see that the company grew earnings per share by an impressive 49% last year. Pleasingly, EPS has also lifted 50% in aggregate from three years ago, 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 9.0% per year during the coming three years according to the six analysts following the company. That's shaping up to be materially lower than the 15% each year growth forecast for the broader market.

In light of this, it's curious that Saudia Dairy & Foodstuff's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

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 Saudia Dairy & Foodstuff currently trades on a 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 moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Saudia Dairy & Foodstuff with six simple checks on some of these key factors.

You might be able to find a better investment than Saudia Dairy & Foodstuff. 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.