Improved Earnings Required Before Arabian Centres Company (TADAWUL:4321) Shares Find Their Feet

With a price-to-earnings (or "P/E") ratio of 7.1x 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 28x and even P/E's higher than 43x 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.

Arabian Centres 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 low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Arabian Centres

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

How Is Arabian Centres' Growth Trending?

Arabian Centres' P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 50%. The strong recent performance means it was also able to grow EPS by 233% in total over the last three years. 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 bring diminished returns, with earnings decreasing 11% per year as estimated by the three analysts watching the company. With the market predicted to deliver 16% growth each year, that's a disappointing outcome.

In light of this, it's understandable that Arabian Centres' P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Arabian Centres' analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you take the next step, you should know about the 4 warning signs for Arabian Centres (2 are significant!) that we have uncovered.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.