Taiba Investment Company's (TADAWUL:4090) Business Is Trailing The Market But Its Shares Aren't

Taiba Investment Company's (TADAWUL:4090) price-to-earnings (or "P/E") ratio of 27.6x 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 21x and even P/E's below 13x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

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Recent times have been quite advantageous for Taiba Investment as its earnings have been rising very briskly. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Taiba Investment

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Taiba Investment's earnings, revenue and cash flow.

Does Growth Match The High P/E?

In order to justify its P/E ratio, Taiba Investment would need to produce impressive growth in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 61% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

This is in contrast to the rest of the market, which is expected to grow by 11% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that Taiba Investment's P/E sits above the majority of other companies. 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 Bottom Line On Taiba Investment'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.

We've established that Taiba Investment 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.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Taiba Investment with six simple checks on some of these key factors.

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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.