Ocean One Holding Ltd. (HKG:8476) shares have continued their recent momentum with a 34% gain in the last month alone. The last month tops off a massive increase of 116% in the last year.

Even after such a large jump in price, it's still not a stretch to say that Ocean One Holding's price-to-earnings (or "P/E") ratio of 10.6x right now seems quite "middle-of-the-road" compared to the market in Hong Kong, where the median P/E ratio is around 9x. 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.

For example, consider that Ocean One Holding's financial performance has been poor lately as its earnings have been in decline. It might be that many expect the company to put the disappointing earnings performance behind them over the coming period, which has kept the P/E from falling. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

Is There Some Growth For Ocean One Holding?

In order to justify its P/E ratio, Ocean One Holding would need to produce growth that's similar to the market.

Retrospectively, the last year delivered a frustrating 11% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 75% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 23% shows it's noticeably less attractive on an annualised basis.

In light of this, it's curious that Ocean One Holding's P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. They may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Final Word

Ocean One Holding appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. 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 Ocean One Holding revealed its three-year earnings trends aren't impacting its P/E as much as we would have predicted, given they look worse than current market expectations. Right now we are uncomfortable with the P/E as this earnings performance isn't likely to support a more positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you take the next step, you should know about the 1 warning sign for Ocean One Holding that we have uncovered.

You might be able to find a better investment than Ocean One Holding. 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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