The Great Eastern Shipping Company Limited (NSE:GESHIP) Surges 26% Yet Its Low P/E Is No Reason For Excitement

The Great Eastern Shipping Company Limited (NSE:GESHIP) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 68%.

Although its price has surged higher, given about half the companies in India have price-to-earnings ratios (or "P/E's") above 35x, you may still consider Great Eastern Shipping as a highly attractive investment with its 6.8x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Great Eastern Shipping could be doing better as it's been growing earnings less than most other companies lately. It seems that many are expecting the uninspiring earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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

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

If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. Still, the latest three year period has seen an excellent 193% overall rise in EPS, in spite of its uninspiring short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 26% as estimated by the only analyst watching the company. With the market predicted to deliver 25% growth , that's a disappointing outcome.

With this information, we are not surprised that Great Eastern Shipping is trading at a P/E lower than the market. 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 Key Takeaway

Shares in Great Eastern Shipping are going to need a lot more upward momentum to get the company's P/E out of its slump. 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.

As we suspected, our examination of Great Eastern Shipping's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Great Eastern Shipping (1 shouldn't be ignored!) that you need to be mindful of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.

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