Despite an already strong run, BW LPG Limited (OB:BWLPG) shares have been powering on, with a gain of 28% in the last thirty days. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 35% over that time.
Although its price has surged higher, BWG's price-to-earnings (or "P/E") ratio of 2.6x might still make it look like a strong buy right now compared to the market in Norway, where around half of the companies have P/E ratios above 16x and even P/E's above 26x are quite common. 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.
Recent times have been pleasing for BWG as its earnings have risen in spite of the market's earnings going into reverse. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, 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.free report on BWG will help you uncover what's on the horizon.
Is There Any Growth For BWG?
The only time you'd be truly comfortable seeing a P/E as depressed as BWG's is when the company's growth is on track to lag the market decidedly.
Retrospectively, the last year delivered an exceptional 278% gain to the company's bottom line. Pleasingly, EPS has also lifted 490% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Shifting to the future, estimates from the five analysts covering the company suggest earnings growth is heading into negative territory, declining 69% over the next year. That's not great when the rest of the market is expected to grow by 42%.
With this information, we are not surprised that BWG is trading at a P/E lower than the market. 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 BWG's P/E?
Even after such a strong price move, BWG's P/E still trails the rest of the market significantly. 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 BWG'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. It's hard to see the share price rising strongly in the near future under these circumstances.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with BWG (at least 1 which is a bit unpleasant), and understanding them should be part of your investment process.
If you're unsure about the strength of BWG'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. 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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