Saudi Azm for Communication and Information Technology Company's (TADAWUL:9534) 29% Price Boost Is Out Of Tune With Earnings

Saudi Azm for Communication and Information Technology Company (TADAWUL:9534) shares have had a really impressive month, gaining 29% after a shaky period beforehand. The annual gain comes to 158% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, given close to half the companies in Saudi Arabia have price-to-earnings ratios (or "P/E's") below 24x, you may consider Saudi Azm for Communication and Information Technology as a stock to avoid entirely with its 62.3x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Earnings have risen firmly for Saudi Azm for Communication and Information Technology recently, which is pleasing to see. It might be that many expect the respectable earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Saudi Azm for Communication and Information Technology

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Saudi Azm for Communication and Information Technology will help you shine a light on its historical performance.

How Is Saudi Azm for Communication and Information Technology's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Saudi Azm for Communication and Information Technology's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered an exceptional 20% gain to the company's bottom line. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 8.8% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 19% shows it's an unpleasant look.

In light of this, it's alarming that Saudi Azm for Communication and Information Technology's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

Saudi Azm for Communication and Information Technology's P/E is flying high just like its stock has during the last month. 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.

We've established that Saudi Azm for Communication and Information Technology currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Saudi Azm for Communication and Information Technology (1 is significant!) that you should be aware of before investing here.

If these risks are making you reconsider your opinion on Saudi Azm for Communication and Information Technology, 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.