It's not a stretch to say that Saudi Chemical Holding Company's (TADAWUL:2230) price-to-earnings (or "P/E") ratio of 22.4x right now seems quite "middle-of-the-road" compared to the market in Saudi Arabia, where the median P/E ratio is around 22x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

With earnings growth that's exceedingly strong of late, Saudi Chemical Holding has been doing very well. The P/E is probably moderate because investors think this strong earnings growth might not be enough to outperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

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 Saudi Chemical Holding's earnings, revenue and cash flow.

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

In order to justify its P/E ratio, Saudi Chemical Holding would need to produce growth that's similar to the market.

Retrospectively, the last year delivered an exceptional 59% gain to the company's bottom line. Pleasingly, EPS has also lifted 319% 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.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 12% shows it's noticeably more attractive on an annualised basis.

With this information, we find it interesting that Saudi Chemical Holding is trading at a fairly similar P/E to the market. Apparently some shareholders believe the recent performance is at its limits and have been accepting lower selling prices.

The Bottom Line On Saudi Chemical Holding's P/E

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Saudi Chemical Holding currently trades on a lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued if recent medium-term earnings trends continue, but investors seem to think future earnings could see some volatility.

Of course, you might also be able to find a better stock than Saudi Chemical Holding. 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.