Saudi Steel Pipes Company's (TADAWUL:1320) 145% Share Price Surge Not Quite Adding Up

Saudi Steel Pipes Company (TADAWUL:1320) shareholders have had their patience rewarded with a 145% share price jump in the last month. The last 30 days were the cherry on top of the stock's 352% gain in the last year, which is nothing short of spectacular.

Even after such a large jump in price, it's still not a stretch to say that Saudi Steel Pipes' price-to-earnings (or "P/E") ratio of 26x right now seems quite "middle-of-the-road" compared to the market in Saudi Arabia, where the median P/E ratio is around 28x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

With earnings growth that's exceedingly strong of late, Saudi Steel Pipes has been doing very well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. 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 not quite in favour.

View our latest analysis for Saudi Steel Pipes

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

Is There Some Growth For Saudi Steel Pipes?

In order to justify its P/E ratio, Saudi Steel Pipes would need to produce growth that's similar to the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 216% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. 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 18% shows it's noticeably less attractive on an annualised basis.

In light of this, it's curious that Saudi Steel Pipes' P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as a continuation of recent earnings trends is likely to weigh down the shares eventually.

What We Can Learn From Saudi Steel Pipes' P/E?

Its shares have lifted substantially and now Saudi Steel Pipes' P/E is also back up to the market median. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Saudi Steel Pipes revealed its three-year earnings trends aren't impacting its P/E as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

Having said that, be aware Saudi Steel Pipes is showing 1 warning sign in our investment analysis, you should know about.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.