Insufficient Growth At Arabian Centres Company (TADAWUL:4321) Hampers Share Price

When close to half the companies in Saudi Arabia have price-to-earnings ratios (or "P/E's") above 21x, you may consider Arabian Centres Company (TADAWUL:4321) as a highly attractive investment with its 7.5x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

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Arabian Centres could be doing better as it's been growing earnings less than most other companies lately. The P/E is probably low because investors think this lacklustre earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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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.

If we review the last year of earnings growth, the company posted a worthy increase of 3.8%. This was backed up an excellent period prior to see EPS up by 215% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 1.8% per year as estimated by the three analysts watching the company. That's shaping up to be materially lower than the 11% per year growth forecast for the broader market.

In light of this, it's understandable that Arabian Centres' P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From Arabian Centres' P/E?

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 growth being lower than the wider market, as expected. 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.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Arabian Centres (1 is a bit concerning!) that you need to be mindful of.

If you're unsure about the strength of Arabian Centres' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.