Hainan Strait Shipping Co.,Ltd.'s (SZSE:002320) Shares May Have Run Too Fast Too Soon

It's not a stretch to say that Hainan Strait Shipping Co.,Ltd.'s (SZSE:002320) price-to-earnings (or "P/E") ratio of 26.6x right now seems quite "middle-of-the-road" compared to the market in China, where the median P/E ratio is around 27x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Recent times have been advantageous for Hainan Strait ShippingLtd as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

View our latest analysis for Hainan Strait ShippingLtd

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How Is Hainan Strait ShippingLtd's Growth Trending?

There's an inherent assumption that a company should be matching the market for P/E ratios like Hainan Strait ShippingLtd's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 109%. The latest three year period has also seen an excellent 54% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 18% per annum as estimated by the one analyst watching the company. That's shaping up to be materially lower than the 24% each year growth forecast for the broader market.

In light of this, it's curious that Hainan Strait ShippingLtd's P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

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 currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Hainan Strait ShippingLtd that 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com