Lacklustre Performance Is Driving Saudi Telecom Company's (TADAWUL:7010) Low P/E

With a price-to-earnings (or "P/E") ratio of 14.2x Saudi Telecom Company (TADAWUL:7010) may be sending bullish signals at the moment, given that almost half of all companies in Saudi Arabia have P/E ratios greater than 25x and even P/E's higher than 37x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

There hasn't been much to differentiate Saudi Telecom's and the market's earnings growth lately. One possibility is that the P/E is low because investors think this modest earnings performance may begin to slide. If not, then existing shareholders have reason to be optimistic about the future direction of the share price.

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Does Growth Match The Low P/E?

Saudi Telecom's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

If we review the last year of earnings growth, the company posted a worthy increase of 14%. The solid recent performance means it was also able to grow EPS by 29% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 6.7% each year during the coming three years according to the analysts following the company. That's shaping up to be materially lower than the 16% each year growth forecast for the broader market.

With this information, we can see why Saudi Telecom is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Saudi Telecom 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.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Saudi Telecom with six simple checks will allow you to discover any risks that could be an issue.

Of course, you might also be able to find a better stock than Saudi Telecom. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.