Al-Etihad Cooperative Insurance Company's (TADAWUL:8170) Earnings Are Not Doing Enough For Some Investors

Al-Etihad Cooperative Insurance Company's (TADAWUL:8170) price-to-earnings (or "P/E") ratio of 9.4x might make it look like a strong buy right now compared to the market in Saudi Arabia, where around half of the companies have P/E ratios above 23x and even P/E's above 40x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

As an illustration, earnings have deteriorated at Al-Etihad Cooperative Insurance over the last year, which is not ideal at all. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for Al-Etihad Cooperative Insurance

Although there are no analyst estimates available for Al-Etihad Cooperative Insurance, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Any Growth For Al-Etihad Cooperative Insurance?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Al-Etihad Cooperative Insurance's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 7.4%. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 15% shows it's noticeably less attractive on an annualised basis.

In light of this, it's understandable that Al-Etihad Cooperative Insurance's P/E sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Bottom Line On Al-Etihad Cooperative Insurance's P/E

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.

As we suspected, our examination of Al-Etihad Cooperative Insurance revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Al-Etihad Cooperative Insurance (at least 1 which doesn't sit too well with us), and understanding them should be part of your investment process.

If you're unsure about the strength of Al-Etihad Cooperative Insurance'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.