Mermaid Maritime Public Company Limited (SGX:DU4) shares have had a horrible month, losing 27% after a relatively good period beforehand. Still, a bad month hasn't completely ruined the past year with the stock gaining 45%, which is great even in a bull market.

Although its price has dipped substantially, given around half the companies in Singapore have price-to-earnings ratios (or "P/E's") below 11x, you may still consider Mermaid Maritime as a stock to potentially avoid with its 14.6x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Mermaid Maritime as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Mermaid Maritime

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Is There Enough Growth For Mermaid Maritime?

There's an inherent assumption that a company should outperform the market for P/E ratios like Mermaid Maritime's to be considered reasonable.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 9.8% last year. Although, the latest three year period in total hasn't been as good 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 year should generate growth of 58% as estimated by the lone analyst watching the company. With the market only predicted to deliver 7.6%, the company is positioned for a stronger earnings result.

With this information, we can see why Mermaid Maritime is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Mermaid Maritime's P/E?

There's still some solid strength behind Mermaid Maritime's P/E, if not its share price lately. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Mermaid Maritime's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Mermaid Maritime (of which 1 can't be ignored!) you should know about.

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

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