What Natural Gas Distribution Company's (TADAWUL:9516) P/E Is Not Telling You

When close to half the companies in Saudi Arabia have price-to-earnings ratios (or "P/E's") below 24x, you may consider Natural Gas Distribution Company (TADAWUL:9516) as a stock to avoid entirely with its 70.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

For example, consider that Natural Gas Distribution's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

Check out our latest analysis for Natural Gas Distribution

Although there are no analyst estimates available for Natural Gas Distribution, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Natural Gas Distribution's Growth Trending?

In order to justify its P/E ratio, Natural Gas Distribution would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a frustrating 15% decrease to the company's bottom line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 9.8% overall rise in EPS. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

This is in contrast to the rest of the market, which is expected to grow by 19% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that Natural Gas Distribution's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

What We Can Learn From Natural Gas Distribution's P/E?

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Natural Gas Distribution currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 3 warning signs for Natural Gas Distribution you should be aware of, and 2 of them can't be ignored.

Of course, you might also be able to find a better stock than Natural Gas Distribution. 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.