Shanghai Kaichuang Marine International Co., Ltd. (SHSE:600097) shares have had a horrible month, losing 27% after a relatively good period beforehand. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 26% in that time.
Even after such a large drop in price, you could still be forgiven for feeling indifferent about Shanghai Kaichuang Marine International's P/E ratio of 24x, since the median price-to-earnings (or "P/E") ratio in China is also close to 24x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.
With earnings growth that's exceedingly strong of late, Shanghai Kaichuang Marine International has been doing very well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. 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 not quite in favour.
How Is Shanghai Kaichuang Marine International's Growth Trending?
The only time you'd be comfortable seeing a P/E like Shanghai Kaichuang Marine International's is when the company's growth is tracking the market closely.
If we review the last year of earnings growth, the company posted a terrific increase of 104%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 51% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 42% shows it's an unpleasant look.
In light of this, it's somewhat alarming that Shanghai Kaichuang Marine International's P/E sits in line with the majority of other companies. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh on the share price eventually.
The Bottom Line On Shanghai Kaichuang Marine International's P/E
With its share price falling into a hole, the P/E for Shanghai Kaichuang Marine International looks quite average now. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
Our examination of Shanghai Kaichuang Marine International revealed its shrinking earnings over the medium-term aren't impacting its P/E as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.
You need to take note of risks, for example - Shanghai Kaichuang Marine International has 4 warning signs (and 1 which is concerning) we think you should know about.
If these risks are making you reconsider your opinion on Shanghai Kaichuang Marine International, 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.