Investor Optimism Abounds Jamjoom Pharmaceuticals Factory Company (TADAWUL:4015) But Growth Is Lacking

With a price-to-earnings (or "P/E") ratio of 24.6x Jamjoom Pharmaceuticals Factory Company (TADAWUL:4015) may be sending bearish signals at the moment, given that almost half of all companies in Saudi Arabia have P/E ratios under 20x and even P/E's lower than 13x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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Jamjoom Pharmaceuticals Factory certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Jamjoom Pharmaceuticals Factory

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Jamjoom Pharmaceuticals Factory.

How Is Jamjoom Pharmaceuticals Factory's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as Jamjoom Pharmaceuticals Factory's is when the company's growth is on track to outshine the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 31% last year. EPS has also lifted 17% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Turning to the outlook, the next three years should generate growth of 13% per year as estimated by the four analysts watching the company. With the market predicted to deliver 12% growth each year, the company is positioned for a comparable earnings result.

With this information, we find it interesting that Jamjoom Pharmaceuticals Factory is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

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 Jamjoom Pharmaceuticals Factory currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Jamjoom Pharmaceuticals Factory with six simple checks.

Of course, you might also be able to find a better stock than Jamjoom Pharmaceuticals Factory. 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.