Shareholders Should Be Pleased With Arabian Contracting Services Company's (TADAWUL:4071) Price

Arabian Contracting Services Company's (TADAWUL:4071) price-to-earnings (or "P/E") ratio of 34.4x might make it look like a sell right now compared to the market in Saudi Arabia, where around half of the companies have P/E ratios below 25x and even P/E's below 17x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's inferior to most other companies of late, Arabian Contracting Services has been relatively sluggish. One possibility is that the P/E is high because investors think this lacklustre earnings performance will improve markedly. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Arabian Contracting Services

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Does Growth Match The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like Arabian Contracting Services' to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 6.4%. Although, the latest three year period in total hasn't been as good as it didn't manage to provide any growth at all. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Shifting to the future, estimates from the seven analysts covering the company suggest earnings should grow by 35% per annum over the next three years. With the market only predicted to deliver 16% per year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Arabian Contracting Services' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more 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 Arabian Contracting Services' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

It is also worth noting that we have found 1 warning sign for Arabian Contracting Services that you need to take into consideration.

You might be able to find a better investment than Arabian Contracting Services. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com