Yamama Saudi Cement Company's (TADAWUL:3020) Shares Lagging The Market But So Is The Business

When close to half the companies in Saudi Arabia have price-to-earnings ratios (or "P/E's") above 24x, you may consider Yamama Saudi Cement Company (TADAWUL:3020) as an attractive investment with its 17.7x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Yamama Saudi Cement certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Yamama Saudi Cement

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

How Is Yamama Saudi Cement's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 90% gain to the company's bottom line. EPS has also lifted 11% in aggregate from three years ago, mostly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Shifting to the future, estimates from the six analysts covering the company suggest earnings growth is heading into negative territory, declining 7.3% per annum over the next three years. With the market predicted to deliver 16% growth per year, that's a disappointing outcome.

With this information, we are not surprised that Yamama Saudi Cement 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. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Yamama Saudi Cement's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. 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.

Before you take the next step, you should know about the 4 warning signs for Yamama Saudi Cement (2 are a bit concerning!) that we have uncovered.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.