Orient Overseas (International) Limited's (HKG:316) Business And Shares Still Trailing The Market

With a price-to-earnings (or "P/E") ratio of 4.3x Orient Overseas (International) Limited (HKG:316) may be sending very bullish signals at the moment, given that almost half of all companies in Hong Kong have P/E ratios greater than 13x and even P/E's higher than 25x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

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With earnings growth that's superior to most other companies of late, Orient Overseas (International) has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Orient Overseas (International)

Want the full picture on analyst estimates for the company? Then our free report on Orient Overseas (International) will help you uncover what's on the horizon.

Is There Any Growth For Orient Overseas (International)?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Orient Overseas (International)'s to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 152% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 73% overall. 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 31% per annum as estimated by the seven analysts watching the company. That's not great when the rest of the market is expected to grow by 15% per year.

In light of this, it's understandable that Orient Overseas (International)'s P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Orient Overseas (International)'s analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It is also worth noting that we have found 2 warning signs for Orient Overseas (International) (1 is significant!) that you need to take into consideration.

Of course, you might also be able to find a better stock than Orient Overseas (International). So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.