Aljouf Mineral Water Bottling Co.'s (TADAWUL:9532) price-to-earnings (or "P/E") ratio of 44.7x might make it look like a strong sell right now compared to the market in Saudi Arabia, where around half of the companies have P/E ratios below 20x and even P/E's below 14x are quite common. 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.

As an illustration, earnings have deteriorated at Aljouf Mineral Water Bottling over the last year, which is not ideal at all. 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.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Aljouf Mineral Water Bottling's earnings, revenue and cash flow.

Is There Enough Growth For Aljouf Mineral Water Bottling?

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

Retrospectively, the last year delivered a frustrating 30% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 51% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 12% shows it's an unpleasant look.

With this information, we find it concerning that Aljouf Mineral Water Bottling is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Final Word

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.

Our examination of Aljouf Mineral Water Bottling revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with Aljouf Mineral Water Bottling (at least 3 which are significant), and understanding them should be part of your investment process.

Of course, you might also be able to find a better stock than Aljouf Mineral Water Bottling. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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.