Valuation of Companies in the Saudi Stock Market: Methods and Influencing

Valuation is defined as the process aimed at estimating the fair or market value of a company or financial asset at a specific point in time. In the Saudi market, valuation holds heightened importance due to the local economy’s ties to factors such as oil prices, government support for certain sectors, and the presence of large companies partially owned by the state. Valuation focuses on analyzing financial performance, cash flows, expansion policies, and future growth expectations, while considering both local and global economic environments. Saudi financial institutions adopt international valuation standards, but also incorporate sector-specific factors such as the oil industry, the stability of the Saudi riyal, and government directives under Vision 2030.

Several methods are used to value companies in the Saudi stock market, the most prominent being: 1- Discounted Cash Flow (DCF) Method: Relies on estimating a company’s future cash flows and discounting them at an appropriate rate of return, often used for large companies like Aramco. 2- Market Comparables Analysis: Compares a company’s performance to its sector peers using indicators such as price-to-earnings (P/E) or price-to-book (P/B) multiples. 3- Net Asset Valuation: Used for industrial or real estate companies, based on estimating asset values after deducting liabilities. 4- Dividend Discount Model: Preferred for companies with stable dividend policies. Each method suits a specific sector, and market conditions and influencing factors must be considered when selecting the optimal approach.

Oil prices are the most influential factor in valuing Saudi companies, especially in the energy and petrochemical sectors. Most major listed companies depend directly or indirectly on oil revenues. Brent crude prices declined by about 15% in May 2025 to $64 per barrel, negatively impacting the valuation of companies such as Aramco and SABIC. Falling oil prices lead to lower profits, which in turn reduces P/E multiples and prompts investors to adjust their future expectations. Therefore, when valuing any Saudi company, it is essential to analyze the sensitivity of its earnings to oil price fluctuations and global energy market forecasts.

Vision 2030 aims to diversify the Saudi economy and reduce reliance on oil, leading to the emergence of new sectors such as technology, tourism, and renewable energy. These shifts have affected valuation, with startups in these fields often valued at higher earnings multiples due to strong growth expectations. Privatization programs and new IPOs, such as offerings in aviation or entertainment, have raised transparency standards and attracted foreign investors, increasing the importance of comparative and international valuation. In this environment, valuation now requires greater flexibility and a deep understanding of economic and investment changes.

The valuation process mainly relies on specific financial indicators, the most important of which are: 1- Price-to-Earnings Ratio (P/E): Measures the relationship between a stock’s price and the company’s earnings, used for sector comparisons. 2- Price-to-Book Ratio (P/B): Especially relevant for banks and financial companies. 3- Dividend Yield: Reflects the stock’s attractiveness to investors seeking regular income. 4- Revenue and Earnings Growth: Used to assess a company’s future growth potential. These indicators vary by sector, and analysts must consider economic conditions and government policies when interpreting them.

Saudi Aramco presents a unique valuation model, being the largest listed company by market capitalization. Its net profits reached approximately $26 billion in Q1 2025 and $26.9 billion in Q3. The company maintains a stable dividend policy of about $75 billion annually, supporting the stability of its valuation. Aramco’s P/E ratio typically ranges between 10 and 12, lower than some global peers due to its massive profits. These indicators highlight the sensitivity of the company’s valuation to oil market fluctuations and the importance of strong cash flows in determining its market value.

The Saudi market is divided into several main sectors, each with its own valuation characteristics: 1- Energy Sector: Dominated by companies like Aramco and SABIC, with valuations dependent on oil prices and global demand. 2- Financial Sector: Includes major banks such as Al Rajhi and Al Ahli, typically showing P/E ratios of 12-15 and relatively high dividend yields. 3- Telecom and Technology Sector: Features companies like STC and Mobily, valued based on revenue growth and market share. 4- Tourism and Entertainment Sectors: Experiencing steady growth due to Vision 2030, with startups often valued at higher multiples due to growth expectations. Valuation methodologies differ across these sectors depending on stability, dividend policies, and growth outlook.

Economic policies play a major role in valuing Saudi companies. Locally, sector support programs, governance, and foreign investment facilitation affect market attractiveness. Globally, trade wars, tariffs, and economic recessions impact capital flows and commodity prices, as seen in 2025 when US tariffs led to declines in oil prices and Gulf stocks. Government decisions to open new sectors or launch IPOs prompt investors to continually reassess companies, making it essential to monitor economic policies and trends closely.

Dividends are a central component in valuing Saudi stocks, as large companies tend to distribute a significant portion of their profits to shareholders. High dividends reduce P/E ratios and attract investors seeking regular income. For example, Aramco commits to substantial annual dividends of $75 billion, supporting its valuation even amid profit fluctuations. When valuing a Saudi stock, analysts must consider dividend policy, yield, and long-term sustainability.

With the Saudi economy expanding into technology, entertainment, and tourism, valuing startups increasingly relies on growth expectations rather than current profits. These companies are often valued at high P/E multiples due to future growth potential and elevated startup risks. Analysts use discounted cash flow models with conservative growth assumptions. When valuing such companies, it is important to assess expansion plans, strategic alliances, and government support under Vision 2030 programs.

The opening of the Saudi market to foreign investors has increased the importance of global standards in valuation. With a broader investor base, valuation is now more dependent on transparency, disclosure, and international governance standards. This has narrowed the gap between Saudi company valuations and their global peers, especially in sectors with large IPOs or international partnerships. Eased foreign capital entry has also boosted valuations in some sectors, particularly finance and technology.

Valuation in the Saudi market faces ongoing challenges, chiefly sharp oil price volatility, sudden economic policy shifts, and varying sector performance. These factors make it difficult to set stable market value estimates, especially for companies reliant on oil exports or government support. Rapid regulatory changes, such as opening new sectors or adjusting foreign ownership limits, require regular updates to valuation models. Therefore, financial analysts must remain flexible and continuously update their assumptions.

Digital technologies and big data have transformed company valuation methods in the Saudi market. Real-time market data analysis and advanced models based on artificial intelligence and analytics now enable analysts to predict rapid changes in stock prices or financial indicators, improving valuation accuracy and reducing investment risks. As digital analysis becomes more prevalent, valuation models are expected to become more integrated with the economic and competitive landscape.

Investors use valuation results to compare companies and determine how attractive a particular stock is relative to sector peers. A low P/E ratio does not necessarily mean a stock is "cheap"; factors such as earnings quality, future growth, and dividend policy must also be considered. Valuation helps build objective decisions, avoiding the influence of rumors or temporary market swings. It also enables investors to spot growth opportunities or potential risks, especially amid ongoing economic and political changes in the Kingdom.