Lacklustre Performance Is Driving Riyadh Cement Co.'s (TADAWUL:9512) Low P/E

Riyadh Cement Co.'s (TADAWUL:9512) price-to-earnings (or "P/E") ratio of 16.6x 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 30x and even P/E's above 56x 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.

With earnings growth that's superior to most other companies of late, Riyadh Cement has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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 Riyadh Cement

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

How Is Riyadh Cement's Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Riyadh Cement's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 87%. The strong recent performance means it was also able to grow EPS by 43% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to slump, contracting by 12% during the coming year according to the dual analysts following the company. Meanwhile, the broader market is forecast to expand by 14%, which paints a poor picture.

In light of this, it's understandable that Riyadh Cement's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

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

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 Riyadh Cement's analyst forecasts revealed that its outlook for shrinking earnings 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.

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

You might be able to find a better investment than Riyadh Cement. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).

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