Stock Analysis

Optimistic Investors Push Edarat Communication and Information Technology Co. (TADAWUL:9557) Shares Up 27% But Growth Is Lacking

SASE:9557
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Edarat Communication and Information Technology Co. (TADAWUL:9557) shares have continued their recent momentum with a 27% gain in the last month alone. The last month tops off a massive increase of 166% in the last year.

After such a large jump in price, given close to half the companies in Saudi Arabia have price-to-earnings ratios (or "P/E's") below 27x, you may consider Edarat Communication and Information Technology as a stock to avoid entirely with its 48.9x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

With earnings growth that's exceedingly strong of late, Edarat Communication and Information Technology has been doing very well. It seems that many are expecting the strong 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.

See our latest analysis for Edarat Communication and Information Technology

pe-multiple-vs-industry
SASE:9557 Price to Earnings Ratio vs Industry May 9th 2024
Although there are no analyst estimates available for Edarat Communication and Information Technology, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Does Growth Match The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Edarat Communication and Information Technology's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 38%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 96% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 19% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we find it concerning that Edarat Communication and Information Technology is trading at a P/E higher than the market. 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. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Bottom Line On Edarat Communication and Information Technology's P/E

Edarat Communication and Information Technology's P/E is flying high just like its stock has during the last month. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Edarat 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. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Plus, you should also learn about these 2 warning signs we've spotted with Edarat Communication and Information Technology (including 1 which can't be ignored).

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

Valuation is complex, but we're helping make it simple.

Find out whether Edarat Communication and Information Technology is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

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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.