With a price-to-earnings (or "P/E") ratio of 9.1x The National Agricultural Development Company (TADAWUL:6010) may be sending very bullish signals at the moment, given that almost half of all companies in Saudi Arabia have P/E ratios greater than 23x and even P/E's higher than 40x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, National Agricultural Development has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on National Agricultural Development .

How Is National Agricultural Development's Growth Trending?

There's an inherent assumption that a company should far underperform the market for P/E ratios like National Agricultural Development's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 45% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, EPS is anticipated to slump, contracting by 11% per year during the coming three years according to the three analysts following the company. With the market predicted to deliver 13% growth each year, that's a disappointing outcome.

With this information, we are not surprised that National Agricultural Development is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Bottom Line On National Agricultural Development'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.

As we suspected, our examination of National Agricultural Development's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

You might be able to find a better investment than National Agricultural Development.

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.