Investors Don't See Light At End Of Saudi Paper Manufacturing Company's (TADAWUL:2300) Tunnel And Push Stock Down 27%

The Saudi Paper Manufacturing Company (TADAWUL:2300) share price has fared very poorly over the last month, falling by a substantial 27%. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 42% in that time.

Following the heavy fall in price, Saudi Paper Manufacturing's price-to-earnings (or "P/E") ratio of 18.9x 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 28x and even P/E's above 43x 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.

Saudi Paper Manufacturing's negative earnings growth of late has neither been better nor worse than most other companies. It might be that many expect the company's earnings performance to degrade further, which has repressed the P/E. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. At the very least, you'd be hoping that earnings don't fall off a cliff if your plan is to pick up some stock while it's out of favour.

Our analysis indicates that 2300 is potentially undervalued!

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

How Is Saudi Paper Manufacturing's Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Saudi Paper Manufacturing's to be considered reasonable.

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. The longer-term trend has been no better as the company has no earnings growth to show for over the last three years either. Accordingly, shareholders probably wouldn't have been satisfied with the complete absence of medium-term growth.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 22% as estimated by the one analyst watching the company. Meanwhile, the broader market is forecast to expand by 18%, which paints a poor picture.

With this information, we are not surprised that Saudi Paper Manufacturing is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Key Takeaway

Saudi Paper Manufacturing's recently weak share price has pulled its P/E below most other companies. 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.

As we suspected, our examination of Saudi Paper Manufacturing's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Saudi Paper Manufacturing (of which 2 are potentially serious!) you should know about.

If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's below 20x.

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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.