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Market Cool On South Port New Zealand Limited's (NZSE:SPN) Earnings

Simply Wall St

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When close to half the companies in New Zealand have price-to-earnings ratios (or "P/E's") above 19x, you may consider South Port New Zealand Limited (NZSE:SPN) as an attractive investment with its 15.5x 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 limited.

Earnings have risen at a steady rate over the last year for South Port New Zealand, which is generally not a bad outcome. One possibility is that the P/E is low because investors think this good earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders may have reason to be optimistic about the future direction of the share price.

See our latest analysis for South Port New Zealand

Where Does South Port New Zealand's P/E Sit Within Its Industry?

It's plausible that South Port New Zealand's low P/E ratio could be a result of tendencies within its own industry. You'll notice in the figure below that P/E ratios in the Infrastructure industry are higher than the market. So it appears the company's ratio isn't currently influenced by these industry numbers whatsoever. Ordinarily, the majority of companies' P/E's would be lifted by the general conditions within the Infrastructure industry. Nonetheless, the greatest force on the company's P/E will be its own earnings growth expectations.

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Want the full picture on earnings, revenue and cash flow for the company? Then our free report on South Port New Zealand will help you shine a light on its historical performance.

Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as South Port New Zealand's is when the company's growth is on track to lag the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 5.6% last year. The latest three year period has also seen a 26% overall rise in EPS, aided somewhat by its short-term performance. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Weighing the recent medium-term upward earnings trajectory against the broader market's one-year forecast for contraction of 7.8% shows it's a great look while it lasts.

With this information, we find it very odd that South Port New Zealand is trading at a P/E lower than the market. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Bottom Line On South Port New Zealand'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.

Our examination of South Port New Zealand revealed its growing earnings over the medium-term aren't contributing to its P/E anywhere near as much as we would have predicted, given the market is set to shrink. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. Perhaps there is some hesitation about the company's ability to stay its recent course and swim against the current of the broader market turmoil. At least the risk of a price drop looks to be subdued, but investors think future earnings could see a lot of volatility.

Having said that, be aware South Port New Zealand is showing 1 warning sign in our investment analysis, you should know about.

If you're unsure about the strength of South Port New Zealand's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

This article by Simply Wall St is general in nature. 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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