Alkhorayef Water and Power Technologies Company's (TADAWUL:2081) Price In Tune With Earnings

When close to half the companies in Saudi Arabia have price-to-earnings ratios (or "P/E's") below 26x, you may consider Alkhorayef Water and Power Technologies Company (TADAWUL:2081) as a stock to avoid entirely with its 42.1x 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 superior to most other companies of late, Alkhorayef Water and Power Technologies has been doing relatively well. 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.

See our latest analysis for Alkhorayef Water and Power Technologies

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How Is Alkhorayef Water and Power Technologies' Growth Trending?

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

If we review the last year of earnings growth, the company posted a terrific increase of 31%. Pleasingly, EPS has also lifted 37% in aggregate from three years ago, thanks to the last 12 months of growth. 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 one analyst covering the company suggest earnings should grow by 41% per year over the next three years. Meanwhile, the rest of the market is forecast to only expand by 16% each year, 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. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Alkhorayef Water and Power Technologies' P/E?

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

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.

There are also other vital risk factors to consider before investing and we've discovered 3 warning signs for Alkhorayef Water and Power Technologies that you should be aware of.

If these risks are making you reconsider your opinion on Alkhorayef Water and Power Technologies, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com