Huabao International Holdings Limited's (HKG:336) Business Is Yet to Catch Up With Its Share Price
When you see that almost half of the companies in the Chemicals industry in Hong Kong have price-to-sales ratios (or "P/S") below 0.5x, Huabao International Holdings Limited (HKG:336) looks to be giving off strong sell signals with its 3.6x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.
View our latest analysis for Huabao International Holdings
What Does Huabao International Holdings' Recent Performance Look Like?
For example, consider that Huabao International Holdings' financial performance has been pretty ordinary lately as revenue growth is non-existent. Perhaps the market believes that revenue growth will improve markedly over current levels, inflating the P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.
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 Huabao International Holdings' earnings, revenue and cash flow.Do Revenue Forecasts Match The High P/S Ratio?
There's an inherent assumption that a company should far outperform the industry for P/S ratios like Huabao International Holdings' to be considered reasonable.
Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. Whilst it's an improvement, it wasn't enough to get the company out of the hole it was in, with revenue down 14% overall from three years ago. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.
Comparing that to the industry, which is predicted to deliver 17% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.
With this information, we find it concerning that Huabao International Holdings is trading at a P/S higher than the industry. 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 revenue trends is likely to weigh heavily on the share price eventually.
What Does Huabao International Holdings' P/S Mean For Investors?
Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.
We've established that Huabao International Holdings currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.
Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Huabao International Holdings that you should be aware of.
Of course, profitable companies with a history of great earnings growth are generally safer bets. 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.