Arabian Centres Company's (TADAWUL:4321) Earnings Are Not Doing Enough For Some Investors

With a price-to-earnings (or "P/E") ratio of 6.6x Arabian Centres Company (TADAWUL:4321) may be sending very bullish signals at the moment, given that almost half of all companies in Saudi Arabia have P/E ratios greater than 24x and even P/E's higher than 37x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Arabian Centres as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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 out of favour.

See our latest analysis for Arabian Centres

Keen to find out how analysts think Arabian Centres' future stacks up against the industry? In that case, our free report is a great place to start.

How Is Arabian Centres' Growth Trending?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 155% last year. Pleasingly, EPS has also lifted 221% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to slump, contracting by 32% during the coming year according to the four analysts following the company. Meanwhile, the broader market is forecast to expand by 16%, which paints a poor picture.

With this information, we are not surprised that Arabian Centres is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

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 Arabian Centres maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

You need to take note of risks, for example - Arabian Centres has 4 warning signs (and 2 which make us uncomfortable) we think you should know about.

Of course, you might also be able to find a better stock than Arabian Centres. 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.