Saudi Paper Manufacturing Company (TADAWUL:2300) Not Lagging Market On Growth Or Pricing

Saudi Paper Manufacturing Company's (TADAWUL:2300) price-to-earnings (or "P/E") ratio of 32.6x 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 19x and even P/E's below 13x 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.

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Saudi Paper Manufacturing hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Saudi Paper Manufacturing

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

What Are Growth Metrics Telling Us About The High P/E?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 47%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 29% overall rise in EPS. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 21% each year during the coming three years according to the one analyst following the company. That's shaping up to be materially higher than the 12% per year growth forecast for the broader market.

With this information, we can see why Saudi Paper Manufacturing is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Saudi Paper Manufacturing maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Plus, you should also learn about these 2 warning signs we've spotted with Saudi Paper Manufacturing (including 1 which is a bit unpleasant).

If you're unsure about the strength of Saudi Paper Manufacturing'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.