Improved Earnings Required Before Saudi Reinsurance Company (TADAWUL:8200) Stock's 29% Jump Looks Justified

The Saudi Reinsurance Company (TADAWUL:8200) share price has done very well over the last month, posting an excellent gain of 29%. The annual gain comes to 161% following the latest surge, making investors sit up and take notice.

Although its price has surged higher, Saudi Reinsurance may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 8.6x, since almost half of all companies in Saudi Arabia have P/E ratios greater than 24x and even P/E's higher than 42x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Saudi Reinsurance as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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.

Check out our latest analysis for Saudi Reinsurance

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

How Is Saudi Reinsurance's Growth Trending?

In order to justify its P/E ratio, Saudi Reinsurance would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered an exceptional 336% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 746% in total over the last three years. 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 slump, contracting by 75% during the coming year according to the lone analyst following the company. Meanwhile, the broader market is forecast to expand by 17%, which paints a poor picture.

With this information, we are not surprised that Saudi Reinsurance is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

What We Can Learn From Saudi Reinsurance's P/E?

Saudi Reinsurance's recent share price jump still sees its P/E sitting firmly flat on the ground. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Saudi Reinsurance maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Saudi Reinsurance (2 are a bit concerning) you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.