With a price-to-earnings (or "P/E") ratio of 22.3x Hutchison Port Holdings Trust (SGX:NS8U) may be sending very bearish signals at the moment, given that almost half of all companies in Singapore have P/E ratios under 12x and even P/E's lower than 6x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
Hutchison Port Holdings Trust has been struggling lately as its earnings have declined faster than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
View our latest analysis for Hutchison Port Holdings Trust
Does Growth Match The High P/E?
In order to justify its P/E ratio, Hutchison Port Holdings Trust would need to produce outstanding growth well in excess of the market.
Retrospectively, the last year delivered a frustrating 72% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 5.8% in aggregate. 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 three analysts covering the company suggest earnings should grow by 21% per annum over the next three years. With the market only predicted to deliver 5.5% per annum, the company is positioned for a stronger earnings result.
In light of this, it's understandable that Hutchison Port Holdings Trust's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Bottom Line On Hutchison Port Holdings Trust'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 Hutchison Port Holdings Trust's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.
There are also other vital risk factors to consider and we've discovered 5 warning signs for Hutchison Port Holdings Trust (2 shouldn't be ignored!) that you should be aware of before investing here.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.
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