Al Hammadi Holding Company's (TADAWUL:4007) Share Price Is Matching Sentiment Around Its Earnings

When close to half the companies in Saudi Arabia have price-to-earnings ratios (or "P/E's") above 23x, you may consider Al Hammadi Holding Company (TADAWUL:4007) as an attractive investment with its 20.3x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

With earnings growth that's inferior to most other companies of late, Al Hammadi Holding has been relatively sluggish. The P/E is probably low because investors think this lacklustre earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Check out our latest analysis for Al Hammadi Holding

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How Is Al Hammadi Holding's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as Al Hammadi Holding's is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered a decent 4.8% gain to the company's bottom line. This was backed up an excellent period prior to see EPS up by 238% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 4.6% per annum over the next three years. Meanwhile, the rest of the market is forecast to expand by 13% each year, which is noticeably more attractive.

In light of this, it's understandable that Al Hammadi Holding'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 Al Hammadi Holding'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.

As we suspected, our examination of Al Hammadi Holding's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Al Hammadi Holding that you should be aware of.

If you're unsure about the strength of Al Hammadi Holding's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.