Saudi Kayan Petrochemical Company's (TADAWUL:2350) Low P/E No Reason For Excitement

Saudi Kayan Petrochemical Company's (TADAWUL:2350) price-to-earnings (or "P/E") ratio of 14.2x 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 27x and even P/E's above 42x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been pleasing for Saudi Kayan Petrochemical as its earnings have risen in spite of the market's earnings going into reverse. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. 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.

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How Is Saudi Kayan Petrochemical's Growth Trending?

In order to justify its P/E ratio, Saudi Kayan Petrochemical would need to produce sluggish growth that's trailing the market.

If we review the last year of earnings growth, the company posted a worthy increase of 5.1%. However, due to its less than impressive performance prior to this period, EPS growth is practically non-existent over the last three years overall. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Shifting to the future, estimates from the eight analysts covering the company suggest earnings should grow by 0.6% each year over the next three years. With the market predicted to deliver 15% growth each year, the company is positioned for a weaker earnings result.

With this information, we can see why Saudi Kayan Petrochemical 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 Key Takeaway

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 Kayan Petrochemical 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. It's hard to see the share price rising strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Saudi Kayan Petrochemical that you should be aware of.

If you're unsure about the strength of Saudi Kayan Petrochemical'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.