Stock Analysis

There's Reason For Concern Over Al Hammadi Holding Company's (TADAWUL:4007) Price

SASE:4007
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When close to half the companies in Saudi Arabia have price-to-earnings ratios (or "P/E's") below 24x, you may consider Al Hammadi Holding Company (TADAWUL:4007) as a stock to potentially avoid with its 30.8x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Al Hammadi Holding certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Al Hammadi Holding

pe-multiple-vs-industry
SASE:4007 Price to Earnings Ratio vs Industry December 28th 2023
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Al Hammadi Holding.

How Is Al Hammadi Holding's Growth Trending?

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

If we review the last year of earnings growth, the company posted a terrific increase of 60%. The latest three year period has also seen an excellent 272% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 7.3% per annum during the coming three years according to the seven analysts following the company. With the market predicted to deliver 16% growth per annum, the company is positioned for a weaker earnings result.

With this information, we find it concerning that Al Hammadi Holding is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Al Hammadi Holding's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Al Hammadi Holding, and understanding 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.