Earnings Not Telling The Story For Saudi Research and Media Group (TADAWUL:4210) After Shares Rise 26%

Despite an already strong run, Saudi Research and Media Group (TADAWUL:4210) shares have been powering on, with a gain of 26% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 58% in the last year.

Since its price has surged higher, given around half the companies in Saudi Arabia have price-to-earnings ratios (or "P/E's") below 28x, you may consider Saudi Research and Media Group as a stock to potentially avoid with its 35.1x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

With earnings growth that's inferior to most other companies of late, Saudi Research and Media Group 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 Saudi Research and Media Group

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

Does Growth Match The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like Saudi Research and Media Group's to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 6.1%. This was backed up an excellent period prior to see EPS up by 196% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 13% each year as estimated by the lone analyst watching the company. Meanwhile, the rest of the market is forecast to expand by 16% per year, which is noticeably more attractive.

With this information, we find it concerning that Saudi Research and Media Group is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On Saudi Research and Media Group's P/E

Saudi Research and Media Group shares have received a push in the right direction, but its P/E is elevated too. 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 Saudi Research and Media Group currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Saudi Research and Media Group (of which 1 is a bit concerning!) you should know about.

Of course, you might also be able to find a better stock than Saudi Research and Media Group. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.