Sundy Service Group Co. Ltd's (HKG:9608) 35% Dip Still Leaving Some Shareholders Feeling Restless Over Its P/ERatio

The Sundy Service Group Co. Ltd (HKG:9608) share price has fared very poorly over the last month, falling by a substantial 35%. For any long-term shareholders, the last month ends a year to forget by locking in a 59% share price decline.

Even after such a large drop in price, Sundy Service Group may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 47.8x, since almost half of all companies in Hong Kong have P/E ratios under 10x and even P/E's lower than 6x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

As an illustration, earnings have deteriorated at Sundy Service Group over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

Check out our latest analysis for Sundy Service Group

Although there are no analyst estimates available for Sundy Service Group, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Does Growth Match The High P/E?

In order to justify its P/E ratio, Sundy Service Group would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a frustrating 49% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 82% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 20% shows it's an unpleasant look.

With this information, we find it concerning that Sundy Service Group is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Bottom Line On Sundy Service Group's P/E

A significant share price dive has done very little to deflate Sundy Service Group's very lofty P/E. 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 Sundy Service Group revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You need to take note of risks, for example - Sundy Service Group has 4 warning signs (and 1 which is a bit concerning) we think you should know about.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.