Hainan Strait Shipping Co.,Ltd.'s (SZSE:002320) Popularity With Investors Is Clear

Hainan Strait Shipping Co.,Ltd.'s (SZSE:002320) price-to-earnings (or "P/E") ratio of 48.8x might make it look like a sell right now compared to the market in China, where around half of the companies have P/E ratios below 37x and even P/E's below 21x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Recent times haven't been advantageous for Hainan Strait ShippingLtd as its earnings have been falling quicker than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Hainan Strait ShippingLtd

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

In order to justify its P/E ratio, Hainan Strait ShippingLtd would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered a frustrating 20% decrease to the company's bottom line. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. 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 101% during the coming year according to the only analyst following the company. That's shaping up to be materially higher than the 38% growth forecast for the broader market.

With this information, we can see why Hainan Strait ShippingLtd is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Hainan Strait ShippingLtd maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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.

You always need to take note of risks, for example - Hainan Strait ShippingLtd has 1 warning sign we think you should be aware of.

You might be able to find a better investment than Hainan Strait ShippingLtd. 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).

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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.