Etihad Etisalat Company's (TADAWUL:7020) Prospects Need A Boost To Lift Shares

With a price-to-earnings (or "P/E") ratio of 17.9x Etihad Etisalat Company (TADAWUL:7020) may be sending bullish signals at the moment, given that almost half of all companies in Saudi Arabia have P/E ratios greater than 28x and even P/E's higher than 43x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

With earnings growth that's superior to most other companies of late, Etihad Etisalat has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Check out our latest analysis for Etihad Etisalat

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Etihad Etisalat.

How Is Etihad Etisalat's Growth Trending?

In order to justify its P/E ratio, Etihad Etisalat would need to produce sluggish growth that's trailing the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 35% last year. The latest three year period has also seen an excellent 185% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the ten analysts covering the company suggest earnings should grow by 13% per annum over the next three years. With the market predicted to deliver 16% growth each year, the company is positioned for a weaker earnings result.

With this information, we can see why Etihad Etisalat is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Etihad Etisalat 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Etihad Etisalat that you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.