Alkhorayef Water and Power Technologies Company's (TADAWUL:2081) P/E Is Still On The Mark Following 27% Share Price Bounce

Despite an already strong run, Alkhorayef Water and Power Technologies Company (TADAWUL:2081) shares have been powering on, with a gain of 27% in the last thirty days. The last 30 days bring the annual gain to a very sharp 37%.

Since its price has surged higher, Alkhorayef Water and Power Technologies may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 36.2x, since almost half of all companies in Saudi Arabia have P/E ratios under 24x and even P/E's lower than 17x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Alkhorayef Water and Power Technologies certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

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

There's an inherent assumption that a company should outperform the market for P/E ratios like Alkhorayef Water and Power Technologies' to be considered reasonable.

Retrospectively, the last year delivered an exceptional 23% gain to the company's bottom line. As a result, it also grew EPS by 28% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 40% each year as estimated by the dual analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 16% per annum, which is noticeably less attractive.

With this information, we can see why Alkhorayef Water and Power Technologies is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

Alkhorayef Water and Power Technologies' P/E is getting right up there since its shares have risen strongly. 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 Alkhorayef Water and Power Technologies' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Alkhorayef Water and Power Technologies, and understanding them should be part of your investment process.

If you're unsure about the strength of Alkhorayef Water and Power Technologies' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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