Revenues Not Telling The Story For K. H. Group Holdings Limited (HKG:1557) After Shares Rise 57%
The K. H. Group Holdings Limited (HKG:1557) share price has done very well over the last month, posting an excellent gain of 57%. The last month tops off a massive increase of 132% in the last year.
After such a large jump in price, when almost half of the companies in Hong Kong's Construction industry have price-to-sales ratios (or "P/S") below 0.4x, you may consider K. H. Group Holdings as a stock probably not worth researching with its 1.1x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.
View our latest analysis for K. H. Group Holdings
What Does K. H. Group Holdings' P/S Mean For Shareholders?
With revenue growth that's exceedingly strong of late, K. H. Group Holdings has been doing very well. Perhaps the market is expecting future revenue performance to outperform the wider market, which has seemingly got people interested in the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.
Although there are no analyst estimates available for K. H. Group Holdings, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.How Is K. H. Group Holdings' Revenue Growth Trending?
There's an inherent assumption that a company should outperform the industry for P/S ratios like K. H. Group Holdings' to be considered reasonable.
Taking a look back first, we see that the company grew revenue by an impressive 57% last year. Still, revenue has fallen 67% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.
Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 20% shows it's an unpleasant look.
With this in mind, we find it worrying that K. H. Group Holdings' P/S exceeds that of its industry peers. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.
What Does K. H. Group Holdings' P/S Mean For Investors?
K. H. Group Holdings' P/S is on the rise since its shares have risen strongly. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
Our examination of K. H. Group Holdings revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. 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.
Having said that, be aware K. H. Group Holdings is showing 3 warning signs in our investment analysis, and 2 of those are concerning.
If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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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.