Saudi Cement Company's (TADAWUL:3030) Price Is Right But Growth Is Lacking

Saudi Cement Company's (TADAWUL:3030) price-to-earnings (or "P/E") ratio of 16.4x 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 41x 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 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.

Check out our latest analysis for Saudi Cement

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

How Is Saudi Cement's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as Saudi Cement's is when the company's growth is on track to lag the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 39% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 9.2% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 0.3% per year over the next three years. With the market predicted to deliver 16% growth per annum, the company is positioned for a weaker earnings result.

In light of this, it's understandable that Saudi Cement's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount 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.

As we suspected, our examination of Saudi Cement's analyst forecasts revealed that its inferior earnings outlook 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.

You always need to take note of risks, for example - Saudi Cement has 1 warning sign we think you should be aware of.

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.