Market Participants Recognise Aldrees Petroleum and Transport Services Company's (TADAWUL:4200) Earnings

Aldrees Petroleum and Transport Services Company's (TADAWUL:4200) price-to-earnings (or "P/E") ratio of 34.3x might make it look like a strong 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 14x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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With earnings growth that's superior to most other companies of late, Aldrees Petroleum and Transport Services has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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Is There Enough Growth For Aldrees Petroleum and Transport Services?

The only time you'd be truly comfortable seeing a P/E as steep as Aldrees Petroleum and Transport Services' is when the company's growth is on track to outshine the market decidedly.

If we review the last year of earnings growth, the company posted a terrific increase of 25%. Pleasingly, EPS has also lifted 80% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the seven analysts covering the company suggest earnings should grow by 17% each year over the next three years. With the market only predicted to deliver 12% each year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Aldrees Petroleum and Transport Services' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Aldrees Petroleum and Transport Services' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Aldrees Petroleum and Transport Services with six simple checks will allow you to discover any risks that could be an issue.

If these risks are making you reconsider your opinion on Aldrees Petroleum and Transport Services, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.