With a median price-to-earnings (or "P/E") ratio of close to 11x in Singapore, you could be forgiven for feeling indifferent about Yangzijiang Shipbuilding (Holdings) Ltd.'s (SGX:BS6) P/E ratio of 10.7x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Yangzijiang Shipbuilding (Holdings) certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. 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.

Want the full picture on analyst estimates for the company? Then our free report on Yangzijiang Shipbuilding (Holdings) will help you uncover what's on the horizon.

Does Growth Match The P/E?

In order to justify its P/E ratio, Yangzijiang Shipbuilding (Holdings) would need to produce growth that's similar to the market.

Retrospectively, the last year delivered an exceptional 71% gain to the company's bottom line. The latest three year period has also seen an excellent 140% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 10% per year during the coming three years according to the seven analysts following the company. Meanwhile, the rest of the market is forecast to expand by 9.7% per year, which is not materially different.

In light of this, it's understandable that Yangzijiang Shipbuilding (Holdings)'s P/E sits in line with the majority of other companies. It seems most investors are expecting to see average future growth and are only willing to pay a moderate amount for the stock.

The Key Takeaway

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Yangzijiang Shipbuilding (Holdings)'s analyst forecasts revealed that its market-matching earnings outlook is contributing to its current P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings won't throw up any surprises. Unless these conditions change, they will continue to support the share price at these levels.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Yangzijiang Shipbuilding (Holdings) with six simple checks on some of these key factors.

You might be able to find a better investment than Yangzijiang Shipbuilding (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.