Dar Al Arkan Real Estate Development Company's (TADAWUL:4300) Share Price Not Quite Adding Up

With a median price-to-earnings (or "P/E") ratio of close to 25x in Saudi Arabia, you could be forgiven for feeling indifferent about Dar Al Arkan Real Estate Development Company's (TADAWUL:4300) P/E ratio of 25.3x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Dar Al Arkan Real Estate Development certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

View our latest analysis for Dar Al Arkan Real Estate Development

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What Are Growth Metrics Telling Us About The P/E?

The only time you'd be comfortable seeing a P/E like Dar Al Arkan Real Estate Development's is when the company's growth is tracking the market closely.

Taking a look back first, we see that the company grew earnings per share by an impressive 70% last year. The latest three year period has also seen an excellent 1,317% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 8.2% per annum as estimated by the four analysts 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 interesting that Dar Al Arkan Real Estate Development is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On Dar Al Arkan Real Estate Development's P/E

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Dar Al Arkan Real Estate Development's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Dar Al Arkan Real Estate Development with six simple checks.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.