Lacklustre Performance Is Driving Ardmore Shipping Corporation's (NYSE:ASC) Low P/E

Ardmore Shipping Corporation's (NYSE:ASC) price-to-earnings (or "P/E") ratio of 5.1x might make it look like a strong buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 15x and even P/E's above 30x 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.

With earnings growth that's inferior to most other companies of late, Ardmore Shipping has been relatively sluggish. 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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Does Growth Match The Low P/E?

Ardmore Shipping's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. Likewise, not much has changed from three years ago as earnings have been stuck during that whole time. Accordingly, shareholders probably wouldn't have been satisfied with the complete absence of medium-term growth.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 13% as estimated by the four analysts watching the company. That's not great when the rest of the market is expected to grow by 4.5%.

With this information, we are not surprised that Ardmore 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 Final Word

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Ardmore Shipping maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. 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.

It is also worth noting that we have found 3 warning signs for Ardmore Shipping (1 is a bit unpleasant!) that you need to take into consideration.

If these risks are making you reconsider your opinion on Ardmore Shipping, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.