Grand Banks Yachts Limited (SGX:G50) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 54%.

In spite of the firm bounce in price, Grand Banks Yachts' price-to-earnings (or "P/E") ratio of 4.2x might still make it look like a strong buy right now compared to the market in Singapore, where around half of the companies have P/E ratios above 12x and even P/E's above 21x are quite common. 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 quite advantageous for Grand Banks Yachts as its earnings have been rising very briskly. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

How Is Grand Banks Yachts' Growth Trending?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Grand Banks Yachts' to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 112%. Pleasingly, EPS has also lifted 406% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 8.4% shows it's noticeably more attractive on an annualised basis.

In light of this, it's peculiar that Grand Banks Yachts' P/E sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Key Takeaway

Shares in Grand Banks Yachts are going to need a lot more upward momentum to get the company's P/E out of its slump. 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.

Our examination of Grand Banks Yachts revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

You need to take note of risks, for example - Grand Banks Yachts has 3 warning signs (and 1 which is potentially serious) we think you should know about.

Of course, you might also be able to find a better stock than Grand Banks Yachts. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.