Hapag-Lloyd Aktiengesellschaft's (ETR:HLAG) Earnings Are Not Doing Enough For Some Investors

Hapag-Lloyd Aktiengesellschaft's (ETR:HLAG) price-to-earnings (or "P/E") ratio of 8.6x might make it look like a strong buy right now compared to the market in Germany, where around half of the companies have P/E ratios above 19x and even P/E's above 34x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

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Recent times have been advantageous for Hapag-Lloyd 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.

Check out our latest analysis for Hapag-Lloyd

Keen to find out how analysts think Hapag-Lloyd's future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The Low P/E?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Hapag-Lloyd's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 209%. Still, incredibly EPS has fallen 84% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 23% each year as estimated by the ten analysts watching the company. Meanwhile, the broader market is forecast to expand by 17% per annum, which paints a poor picture.

In light of this, it's understandable that Hapag-Lloyd's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

What We Can Learn From Hapag-Lloyd's P/E?

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Hapag-Lloyd maintains its low P/E on the weakness of its forecast for sliding earnings, 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. It's hard to see the share price rising strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Hapag-Lloyd (of which 1 doesn't sit too well with us!) you should know about.

You might be able to find a better investment than Hapag-Lloyd. 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.