Risks To Shareholder Returns Are Elevated At These Prices For Dr. Sulaiman Al Habib Medical Services Group Company (TADAWUL:4013)

Dr. Sulaiman Al Habib Medical Services Group Company's (TADAWUL:4013) price-to-earnings (or "P/E") ratio of 43.5x might make it look like a strong sell right now compared to the market in Saudi Arabia, where around half of the companies have P/E ratios below 23x and even P/E's below 15x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Recent earnings growth for Dr. Sulaiman Al Habib Medical Services Group has been in line with the market. It might be that many expect the mediocre earnings performance to strengthen positively, which has kept the P/E from falling. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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Is There Enough Growth For Dr. Sulaiman Al Habib Medical Services Group?

Dr. Sulaiman Al Habib Medical Services Group's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

If we review the last year of earnings growth, the company posted a worthy increase of 13%. The latest three year period has also seen an excellent 70% overall rise in EPS, aided somewhat 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.

Shifting to the future, estimates from the eight analysts covering the company suggest earnings should grow by 15% each year over the next three years. Meanwhile, the rest of the market is forecast to expand by 15% each year, which is not materially different.

With this information, we find it interesting that Dr. Sulaiman Al Habib Medical Services Group is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

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.

We've established that Dr. Sulaiman Al Habib Medical Services Group currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 2 warning signs for Dr. Sulaiman Al Habib Medical Services Group you should be aware of, and 1 of them doesn't sit too well with us.

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.