Subdued Growth No Barrier To Southern Province Cement Company's (TADAWUL:3050) Price

It's not a stretch to say that Southern Province Cement Company's (TADAWUL:3050) price-to-earnings (or "P/E") ratio of 30.9x right now seems quite "middle-of-the-road" compared to the market in Saudi Arabia, where the median P/E ratio is around 28x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

While the market has experienced earnings growth lately, Southern Province Cement's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is moderate because investors think this poor earnings performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

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Is There Some Growth For Southern Province Cement?

The only time you'd be comfortable seeing a P/E like Southern Province Cement's is when the company's growth is tracking the market closely.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 45%. The last three years don't look nice either as the company has shrunk EPS by 71% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 12% as estimated by the two analysts watching the company. That's shaping up to be materially lower than the 19% growth forecast for the broader market.

In light of this, it's curious that Southern Province Cement's P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Southern Province Cement's P/E?

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.

We've established that Southern Province Cement currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

You always need to take note of risks, for example - Southern Province Cement has 2 warning signs we think you should be aware of.

If these risks are making you reconsider your opinion on Southern Province Cement, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.