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Unfortunately for some shareholders, the Star Bulk Carriers Corp. (NASDAQ:SBLK) share price has dived 25% in the last thirty days, prolonging recent pain. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 20% in that time.
After such a large drop in price, given close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 15x, you may consider Star Bulk Carriers as a highly attractive investment with its 2.2x P/E ratio. 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.
Recent times have been advantageous for Star Bulk Carriers as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
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How Is Star Bulk Carriers' Growth Trending?
There's an inherent assumption that a company should far underperform the market for P/E ratios like Star Bulk Carriers' to be considered reasonable.
If we review the last year of earnings growth, the company posted a terrific increase of 307%. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.
Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 15% per year as estimated by the four analysts watching the company. With the market predicted to deliver 9.7% growth per year, that's a disappointing outcome.
With this information, we are not surprised that Star Bulk Carriers 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. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.
The Final Word
Having almost fallen off a cliff, Star Bulk Carriers' share price has pulled its P/E way down as well. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.