With a price-to-earnings (or "P/E") ratio of 5.1x Qingdao Port International Co., Ltd. (HKG:6198) may be sending bullish signals at the moment, given that almost half of all companies in Hong Kong have P/E ratios greater than 9x and even P/E's higher than 19x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Recent times have been pleasing for Qingdao Port International 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 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 Qingdao Port International
How Is Qingdao Port International's Growth Trending?
There's an inherent assumption that a company should underperform the market for P/E ratios like Qingdao Port International's to be considered reasonable.
If we review the last year of earnings growth, the company posted a worthy increase of 14%. EPS has also lifted 29% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.
Looking ahead now, EPS is anticipated to climb by 1.1% during the coming year according to the lone analyst following the company. That's shaping up to be materially lower than the 23% growth forecast for the broader market.
In light of this, it's understandable that Qingdao Port International's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.
What We Can Learn From Qingdao Port International's P/E?
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 Qingdao Port International's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. 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.
You should always think about risks. Case in point, we've spotted 1 warning sign for Qingdao Port International you should be aware of.
You might be able to find a better investment than Qingdao Port International. 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.