Saudi Steel Pipes Company (TADAWUL:1320) Stock Catapults 28% Though Its Price And Business Still Lag The Market

The Saudi Steel Pipes Company (TADAWUL:1320) share price has done very well over the last month, posting an excellent gain of 28%. Looking back a bit further, it's encouraging to see the stock is up 46% in the last year.

Even after such a large jump in price, Saudi Steel Pipes' price-to-earnings (or "P/E") ratio of 14.2x might still make it look like a buy right now compared to the market in Saudi Arabia, where around half of the companies have P/E ratios above 26x and even P/E's above 38x 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 limited.

With earnings growth that's superior to most other companies of late, Saudi Steel Pipes has been doing relatively well. 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 Steel Pipes

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

How Is Saudi Steel Pipes' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as Saudi Steel Pipes' is when the company's growth is on track to lag the market.

If we review the last year of earnings growth, the company posted a terrific increase of 369%. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 11% each year as estimated by the one analyst watching the company. Meanwhile, the broader market is forecast to expand by 15% per annum, which paints a poor picture.

With this information, we are not surprised that Saudi Steel Pipes 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. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

Saudi Steel Pipes' stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Saudi Steel Pipes' analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. 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.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Saudi Steel Pipes (2 shouldn't be ignored!) that you need to be mindful 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.