With a price-to-earnings (or "P/E") ratio of 2.3x Safe Bulkers, Inc. (NYSE:SB) may be sending very bullish signals at the moment, given that almost half of all companies in the United States have P/E ratios greater than 16x and even P/E's higher than 32x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.
With earnings growth that's superior to most other companies of late, Safe Bulkers has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
Want the full picture on analyst estimates for the company? Then our free report on Safe Bulkers will help you uncover what's on the horizon.
How Is Safe Bulkers' Growth Trending?
There's an inherent assumption that a company should far underperform the market for P/E ratios like Safe Bulkers' to be considered reasonable.
Taking a look back first, we see that the company grew earnings per share by an impressive 220% last year. The strong recent performance means it was also able to grow EPS by 1,168% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.
Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 5.2% per year as estimated by the three analysts watching the company. Meanwhile, the broader market is forecast to expand by 9.6% per annum, which paints a poor picture.
With this information, we are not surprised that Safe Bulkers 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.
What We Can Learn From Safe Bulkers' 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 Safe Bulkers' analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Safe Bulkers (at least 1 which can't be ignored), and understanding these should be part of your investment process.
If you're unsure about the strength of Safe Bulkers' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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.
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