There's Reason For Concern Over Saudi Paper Manufacturing Company's (TADAWUL:2300) Massive 25% Price Jump

Saudi Paper Manufacturing Company (TADAWUL:2300) shares have had a really impressive month, gaining 25% after a shaky period beforehand. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 2.1% over the last year.

Following the firm bounce in price, given around half the companies in Saudi Arabia have price-to-earnings ratios (or "P/E's") below 22x, you may consider Saudi Paper Manufacturing as a stock to potentially avoid with its 24.8x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

We've discovered 2 warning signs about Saudi Paper Manufacturing. View them for free.

With earnings growth that's superior to most other companies of late, Saudi Paper Manufacturing has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Saudi Paper Manufacturing

Keen to find out how analysts think Saudi Paper Manufacturing's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Saudi Paper Manufacturing's Growth Trending?

In order to justify its P/E ratio, Saudi Paper Manufacturing would need to produce impressive growth in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 111%. The latest three year period has also seen an excellent 59% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 11% during the coming year according to the sole analyst following the company. With the market predicted to deliver 11% growth , the company is positioned for a comparable earnings result.

With this information, we find it interesting that Saudi Paper Manufacturing is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Final Word

Saudi Paper Manufacturing's P/E is getting right up there since its shares have risen strongly. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Saudi Paper Manufacturing's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

It is also worth noting that we have found 2 warning signs for Saudi Paper Manufacturing (1 is potentially serious!) that you need to take into consideration.

Of course, you might also be able to find a better stock than Saudi Paper Manufacturing. 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.