Etihad Etisalat Company's (TADAWUL:7020) price-to-earnings (or "P/E") ratio of 14.9x might make it look like a buy right now compared to the market in Saudi Arabia, where around half of the companies have P/E ratios above 19x and even P/E's above 33x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Etihad Etisalat as its earnings have been rising faster than most other companies. 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 Etihad Etisalat.

Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as Etihad Etisalat's is when the company's growth is on track to lag the market.

If we review the last year of earnings growth, the company posted a terrific increase of 22%. The strong recent performance means it was also able to grow EPS by 155% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 5.9% each year during the coming three years according to the twelve analysts following the company. With the market predicted to deliver 12% growth per year, the company is positioned for a weaker earnings result.

With this information, we can see why Etihad Etisalat is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From Etihad Etisalat's P/E?

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Etihad Etisalat maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Etihad Etisalat with six simple checks will allow you to discover any risks that could be an issue.

Of course, you might also be able to find a better stock than Etihad Etisalat. 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.