Yahoo Finance Should You Be Tempted To Sell SINA Corporation (NASDAQ:SINA) Because Of Its PE Ratio?
The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to begin learning the link between SINA Corporation (NASDAQ:SINA)’s fundamentals and stock market performance.
SINA Corporation (NASDAQ:SINA) is currently trading at a trailing P/E of 43.4x, which is higher than the industry average of 33.2x. While this makes SINA appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. View out our latest analysis for SINA
Demystifying the P/E ratio
The P/E ratio is one of many ratios used in relative valuation. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for SINA
Price-Earnings Ratio = Price per share ÷ Earnings per share
SINA Price-Earnings Ratio = $89.14 ÷ $2.055 = 43.4x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as SINA, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. Since SINA’s P/E of 43.4x is higher than its industry peers (33.2x), it means that investors are paying more than they should for each dollar of SINA’s earnings. As such, our analysis shows that SINA represents an over-priced stock.
Assumptions to watch out for
However, before you rush out to sell your SINA shares, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to SINA. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with SINA, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing SINA to are fairly valued by the market. If this does not hold true, SINA’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to SINA. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for SINA’s future growth? Take a look at our free research report of analyst consensus for SINA’s outlook.
Past Track Record: Has SINA been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of SINA’s historicals for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
