Improved Earnings Required Before SinoMedia Holding Limited (HKG:623) Stock's 38% Jump Looks Justified

Despite an already strong run, SinoMedia Holding Limited (HKG:623) shares have been powering on, with a gain of 38% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 38% in the last year.

In spite of the firm bounce in price, SinoMedia Holding's price-to-earnings (or "P/E") ratio of 6.7x 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 10x and even P/E's above 20x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

For instance, SinoMedia Holding's 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.

Check out our latest analysis for SinoMedia Holding

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

Is There Any Growth For SinoMedia Holding?

In order to justify its P/E ratio, SinoMedia Holding would need to produce sluggish growth that's trailing the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 21%. As a result, earnings from three years ago have also fallen 26% overall. 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 23% 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 SinoMedia Holding's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

The Final Word

Despite SinoMedia Holding's shares building up a head of steam, its P/E still lags 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.

As we suspected, our examination of SinoMedia Holding revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. 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.

We don't want to rain on the parade too much, but we did also find 2 warning signs for SinoMedia Holding that you need to be mindful of.

Of course, you might also be able to find a better stock than SinoMedia Holding. 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.