Heung-A Shipping Co.,Ltd.'s (KRX:003280) Shares Climb 27% But Its Business Is Yet to Catch Up

Heung-A Shipping Co.,Ltd. (KRX:003280) shares have had a really impressive month, gaining 27% after a shaky period beforehand. The last month tops off a massive increase of 153% in the last year.

Since its price has surged higher, given close to half the companies in Korea have price-to-earnings ratios (or "P/E's") below 13x, you may consider Heung-A ShippingLtd as a stock to avoid entirely with its 24.7x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Recent times have been quite advantageous for Heung-A ShippingLtd as its earnings have been rising very briskly. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Heung-A 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 Heung-A ShippingLtd's earnings, revenue and cash flow.

How Is Heung-A ShippingLtd's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Heung-A ShippingLtd's is when the company's growth is on track to outshine the market decidedly.

If we review the last year of earnings growth, the company posted a terrific increase of 51%. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 28% shows it's noticeably less attractive on an annualised basis.

With this information, we find it concerning that Heung-A ShippingLtd is trading at a P/E higher than the market. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

What We Can Learn From Heung-A ShippingLtd's P/E?

Shares in Heung-A ShippingLtd have built up some good momentum lately, which has really inflated its P/E. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Heung-A 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. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You need to take note of risks, for example - Heung-A ShippingLtd has 2 warning signs (and 1 which can't be ignored) we think you should know about.

You might be able to find a better investment than Heung-A 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.