What You Can Learn From Horizon Food Company Limited's (TADAWUL:9564) P/E

When close to half the companies in Saudi Arabia have price-to-earnings ratios (or "P/E's") below 26x, you may consider Horizon Food Company Limited (TADAWUL:9564) as a stock to potentially avoid with its 38.1x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

The recent earnings growth at Horizon Food would have to be considered satisfactory if not spectacular. One possibility is that the P/E is high because investors think this good earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for Horizon Food

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

Is There Enough Growth For Horizon Food?

There's an inherent assumption that a company should outperform the market for P/E ratios like Horizon Food's to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 4.1%. Pleasingly, EPS has also lifted 182% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

This is in contrast to the rest of the market, which is expected to grow by 18% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Horizon Food's P/E sits above the majority of other companies. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

What We Can Learn From Horizon Food's P/E?

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.

As we suspected, our examination of Horizon Food revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Horizon Food (1 is potentially serious!) that you should be aware of before investing here.

You might be able to find a better investment than Horizon Food. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com