When close to half the companies in Saudi Arabia have price-to-earnings ratios (or "P/E's") below 26x, you may consider Saudi Paper Manufacturing Company (TADAWUL:2300) as a stock to potentially avoid with its 33.4x 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 as high as it is.

While the market has experienced earnings growth lately, Saudi Paper Manufacturing's earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Saudi Paper Manufacturing

Want the full picture on analyst estimates for the company? Then our free report on Saudi Paper Manufacturing will help you uncover what's on the horizon.

Does Growth Match The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like Saudi Paper Manufacturing's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 2.2%. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Looking ahead now, EPS is anticipated to climb by 44% during the coming year according to the one analyst following the company. That's shaping up to be materially higher than the 16% growth forecast for the broader market.

In light of this, it's understandable that Saudi Paper Manufacturing's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

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.

As we suspected, our examination of Saudi Paper Manufacturing's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Saudi Paper Manufacturing (1 makes us a bit uncomfortable) you should be aware of.

You might be able to find a better investment than Saudi Paper Manufacturing. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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.