Group Five Pipe Saudi Company's (TADAWUL:9523) 38% Price Boost Is Out Of Tune With Earnings

Group Five Pipe Saudi Company (TADAWUL:9523) shareholders would be excited to see that the share price has had a great month, posting a 38% gain and recovering from prior weakness. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 11% in the last twelve months.

Since its price has surged higher, given around half the companies in Saudi Arabia have price-to-earnings ratios (or "P/E's") below 20x, you may consider Group Five Pipe Saudi as a stock to potentially avoid with its 28.3x 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 as high as it is.

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Recent times have been quite advantageous for Group Five Pipe Saudi as its earnings have been rising very briskly. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Group Five Pipe Saudi

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Group Five Pipe Saudi will help you shine a light on its historical performance.

Is There Enough Growth For Group Five Pipe Saudi?

In order to justify its P/E ratio, Group Five Pipe Saudi would need to produce impressive growth in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 311%. The latest three year period has also seen a 9.7% overall rise in EPS, aided extensively by its short-term performance. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 11% shows it's noticeably less attractive on an annualised basis.

With this information, we find it concerning that Group Five Pipe Saudi is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Final Word

Group Five Pipe Saudi's P/E is getting right up there since its shares have risen strongly. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Group Five Pipe Saudi currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Group Five Pipe Saudi that you need to be mindful of.

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

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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.