South Ocean Holdings Limited (JSE:SOH) Stock Catapults 36% Though Its Price And Business Still Lag The Market

Those holding South Ocean Holdings Limited (JSE:SOH) shares would be relieved that the share price has rebounded 36% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Looking back a bit further, it's encouraging to see the stock is up 75% in the last year.

Even after such a large jump in price, given about half the companies in South Africa have price-to-earnings ratios (or "P/E's") above 10x, you may still consider South Ocean Holdings as an attractive investment with its 5.3x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

South Ocean Holdings certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for South Ocean Holdings

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 South Ocean Holdings' earnings, revenue and cash flow.

What Are Growth Metrics Telling Us About The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as South Ocean Holdings' is when the company's growth is on track to lag the market.

If we review the last year of earnings growth, the company posted a terrific increase of 37%. The latest three year period has also seen a 18% overall rise in EPS, aided extensively by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 18% shows it's noticeably less attractive on an annualised basis.

With this information, we can see why South Ocean Holdings is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Final Word

South Ocean Holdings' stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that South Ocean Holdings maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, 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. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

Before you take the next step, you should know about the 3 warning signs for South Ocean Holdings (1 can't be ignored!) that we have uncovered.

You might be able to find a better investment than South Ocean Holdings. 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.