Aljouf Mineral Water Bottling Co.'s (TADAWUL:9532) 33% Price Boost Is Out Of Tune With Earnings

Aljouf Mineral Water Bottling Co. (TADAWUL:9532) shareholders would be excited to see that the share price has had a great month, posting a 33% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 17% over that time.

After such a large jump in price, given around half the companies in Saudi Arabia have price-to-earnings ratios (or "P/E's") below 24x, you may consider Aljouf Mineral Water Bottling as a stock to potentially avoid with its 33.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

For instance, Aljouf Mineral Water Bottling's receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

See our latest analysis for Aljouf Mineral Water Bottling

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Aljouf Mineral Water Bottling will help you shine a light on its historical performance.

Is There Enough Growth For Aljouf Mineral Water Bottling?

Aljouf Mineral Water Bottling's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Retrospectively, the last year delivered a frustrating 39% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 45% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 19% shows it's an unpleasant look.

With this information, we find it concerning that Aljouf Mineral Water Bottling is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

What We Can Learn From Aljouf Mineral Water Bottling's P/E?

The large bounce in Aljouf Mineral Water Bottling's shares has lifted the company's P/E to a fairly high level. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Aljouf Mineral Water Bottling currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 3 warning signs for Aljouf Mineral Water Bottling you should be aware of, and 1 of them is a bit unpleasant.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.