Pinning Down Hainan Strait Shipping Co.,Ltd.'s (SZSE:002320) P/E Is Difficult Right Now

Hainan Strait Shipping Co.,Ltd.'s (SZSE:002320) price-to-earnings (or "P/E") ratio of 49x 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 38x 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.

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As an illustration, earnings have deteriorated at Hainan Strait ShippingLtd over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

View our latest analysis for Hainan Strait ShippingLtd

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Hainan Strait ShippingLtd's earnings, revenue and cash flow.

How Is Hainan Strait ShippingLtd's Growth Trending?

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

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. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Comparing that to the market, which is predicted to deliver 37% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's alarming that Hainan Strait ShippingLtd's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Bottom Line On Hainan Strait ShippingLtd's P/E

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Hainan Strait ShippingLtd revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Plus, you should also learn about this 1 warning sign we've spotted with Hainan Strait ShippingLtd.

If you're unsure about the strength of Hainan Strait ShippingLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.