Sundart Holdings Limited (HKG:1568) Held Back By Insufficient Growth Even After Shares Climb 25%

Explore Sundart Holdings's Fair Values from the Community and select yours

Sundart Holdings Limited (HKG:1568) shareholders would be excited to see that the share price has had a great month, posting a 25% gain and recovering from prior weakness. The last month tops off a massive increase of 147% in the last year.

In spite of the firm bounce in price, Sundart Holdings' price-to-earnings (or "P/E") ratio of 6x might still make it look like a buy right now compared to the market in Hong Kong, where around half of the companies have P/E ratios above 12x and even P/E's above 26x 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 limited.

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For instance, Sundart Holdings' receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for Sundart Holdings

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Sundart Holdings' earnings, revenue and cash flow.

What Are Growth Metrics Telling Us About The Low P/E?

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

Retrospectively, the last year delivered a frustrating 2.9% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 14% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 20% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's understandable that Sundart Holdings' P/E would sit below the majority of other companies. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

The Key Takeaway

The latest share price surge wasn't enough to lift Sundart Holdings' P/E close to the market median. 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.

We've established that Sundart Holdings maintains its low P/E on the weakness of its sliding earnings over the medium-term, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

Having said that, be aware Sundart Holdings is showing 2 warning signs in our investment analysis, and 1 of those doesn't sit too well with us.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.