Why Investors Shouldn't Be Surprised By Etihad Etisalat Company's (TADAWUL:7020) Low P/E

When close to half the companies in Saudi Arabia have price-to-earnings ratios (or "P/E's") above 25x, you may consider Etihad Etisalat Company (TADAWUL:7020) as an attractive investment with its 18.4x P/E ratio. 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. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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.

What Are Growth Metrics Telling Us About The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like Etihad Etisalat's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 52% gain to the company's bottom line. The latest three year period has also seen an excellent 407% 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.

Looking ahead now, EPS is anticipated to climb by 11% each year during the coming three years according to the eight analysts following the company. Meanwhile, the rest of the market is forecast to expand by 16% per annum, which is noticeably more attractive.

In light of this, it's understandable that Etihad Etisalat's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

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.

As we suspected, our examination of Etihad Etisalat's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. 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.

You should always think about risks. Case in point, we've spotted 1 warning sign for Etihad Etisalat you should be aware of.

Of course, you might also be able to find a better stock than Etihad Etisalat. 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.