When close to half the companies in Taiwan have price-to-earnings ratios (or "P/E's") above 19x, you may consider Wan Hai Lines Ltd. (TPE:2615) as an attractive investment with its 15.4x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Wan Hai Lines has been doing a good job lately as it's been growing earnings at a solid pace. It might be that many expect the respectable earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.
See our latest analysis for Wan Hai Lines
Where Does Wan Hai Lines' P/E Sit Within Its Industry?
We'd like to see if P/E's within Wan Hai Lines' industry might provide some colour around the company's low P/E ratio. The image below shows that the Shipping industry as a whole also has a P/E ratio lower than the market. So it appears the company's ratio could be influenced considerably by these industry numbers currently. In the context of the Shipping industry's current setting, most of its constituents' P/E's would be expected to be toned down. Whilst this can be a heavy component, industry factors are normally secondary to company financials and earnings.
Is There Any Growth For Wan Hai Lines?
In order to justify its P/E ratio, Wan Hai Lines would need to produce sluggish growth that's trailing the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 29% last year. Pleasingly, EPS has also lifted 192% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.
This is in contrast to the rest of the market, which is expected to grow by 14% over the next year, materially lower than the company's recent medium-term annualised growth rates.
With this information, we find it odd that Wan Hai Lines is trading at a P/E lower than the market. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.
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.
Our examination of Wan Hai Lines revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.
There are also other vital risk factors to consider and we've discovered 3 warning signs for Wan Hai Lines (1 is a bit concerning!) that you should be aware of before investing here.
If these risks are making you reconsider your opinion on Wan Hai Lines, explore our interactive list of high quality stocks to get an idea of what else is out there.
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