Al Rajhi Company for Cooperative Insurance's (TADAWUL:8230) Shares Climb 25% But Its Business Is Yet to Catch Up

Al Rajhi Company for Cooperative Insurance (TADAWUL:8230) shares have continued their recent momentum with a 25% gain in the last month alone. The annual gain comes to 228% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, Al Rajhi Company for Cooperative Insurance's price-to-earnings (or "P/E") ratio of 47.6x 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 25x and even P/E's below 17x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Al Rajhi Company for Cooperative Insurance certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Al Rajhi Company for Cooperative Insurance

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Al Rajhi Company for Cooperative Insurance will help you shine a light on its historical performance.

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as Al Rajhi Company for Cooperative Insurance's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered an exceptional 191% gain to the company's bottom line. The latest three year period has also seen an excellent 46% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

This is in contrast to the rest of the market, which is expected to grow by 18% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that Al Rajhi Company for Cooperative Insurance's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Bottom Line On Al Rajhi Company for Cooperative Insurance's P/E

The strong share price surge has got Al Rajhi Company for Cooperative Insurance's P/E rushing to great heights as well. 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.

We've established that Al Rajhi Company for Cooperative Insurance currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It is also worth noting that we have found 1 warning sign for Al Rajhi Company for Cooperative Insurance that you need to take into consideration.

If you're unsure about the strength of Al Rajhi Company for 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.

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