Why Investors Shouldn't Be Surprised By Alkhorayef Water and Power Technologies Company's (TADAWUL:2081) 29% Share Price Surge

Alkhorayef Water and Power Technologies Company (TADAWUL:2081) shares have continued their recent momentum with a 29% gain in the last month alone. The annual gain comes to 102% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, given close to half the companies in Saudi Arabia have price-to-earnings ratios (or "P/E's") below 27x, you may consider Alkhorayef Water and Power Technologies as a stock to avoid entirely with its 50.9x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Alkhorayef Water and Power Technologies as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. 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

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Alkhorayef Water and Power Technologies.

How Is Alkhorayef Water and Power Technologies' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Alkhorayef Water and Power Technologies' is when the company's growth is on track to outshine the market decidedly.

If we review the last year of earnings growth, the company posted a terrific increase of 23%. 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.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 40% per year over the next three years. With the market only predicted to deliver 16% per year, the company is positioned for a stronger earnings result.

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 Key Takeaway

Shares in Alkhorayef Water and Power Technologies have built up some good momentum lately, which has really inflated its P/E. 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.

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.

You always need to take note of risks, for example - Alkhorayef Water and Power Technologies has 2 warning signs we think 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.