Improved Earnings Required Before Star Bulk Carriers Corp. (NASDAQ:SBLK) Shares Find Their Feet

Star Bulk Carriers Corp.'s (NASDAQ:SBLK) price-to-earnings (or "P/E") ratio of 6.2x 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 20x and even P/E's above 36x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, Star Bulk Carriers has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Star Bulk Carriers

Want the full picture on analyst estimates for the company? Then our free report on Star Bulk Carriers will help you uncover what's on the horizon.

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 Star Bulk Carriers' to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 12%. However, this wasn't enough as the latest three year period has seen an unpleasant 37% overall drop in EPS. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the five analysts covering the company suggest earnings growth is heading into negative territory, declining 6.6% over the next year. With the market predicted to deliver 15% growth , that's a disappointing outcome.

With this information, we are not surprised that Star Bulk Carriers 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. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

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.

We've established that Star Bulk Carriers maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Star Bulk Carriers that you should be aware of.

You might be able to find a better investment than Star Bulk Carriers. 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.