There Is A Reason Saudi Steel Pipes Company's (TADAWUL:1320) Price Is Undemanding

Saudi Steel Pipes Company's (TADAWUL:1320) price-to-earnings (or "P/E") ratio of 16.1x might 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 42x 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.

See our latest analysis for Saudi Steel Pipes

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Saudi Steel Pipes.

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.

Taking a look back first, we see that the company grew earnings per share by an impressive 375% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Turning to the outlook, the next year should generate growth of 7.5% as estimated by the one analyst watching the company. That's shaping up to be materially lower than the 19% growth forecast for the broader market.

With this information, we can see why Saudi Steel Pipes is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

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 Saudi Steel Pipes maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Saudi Steel Pipes that you should be aware of.

Of course, you might also be able to find a better stock than Saudi Steel Pipes. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com