With Malath Cooperative Insurance Company (TADAWUL:8020) It Looks Like You'll Get What You Pay For

Malath Cooperative Insurance Company's (TADAWUL:8020) price-to-earnings (or "P/E") ratio of 53.8x 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 27x and even P/E's below 20x 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.

With earnings growth that's superior to most other companies of late, Malath Cooperative Insurance has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Malath Cooperative Insurance

Want the full picture on analyst estimates for the company? Then our free report on Malath Cooperative Insurance will help you uncover what's on the horizon.

Is There Enough Growth For Malath Cooperative Insurance?

Malath Cooperative Insurance'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 terrific increase of 340%. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Shifting to the future, estimates from the twin analysts covering the company suggest earnings should grow by 18% per annum over the next three years. That's shaping up to be materially higher than the 13% per year growth forecast for the broader market.

With this information, we can see why Malath Cooperative Insurance is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

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 Malath Cooperative Insurance's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Malath Cooperative Insurance that you need to be mindful of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).

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This article by Simply Wall St is general in nature. 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.
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