Some Confidence Is Lacking In Honworld Group Limited's (HKG:2226) P/S
There wouldn't be many who think Honworld Group Limited's (HKG:2226) price-to-sales (or "P/S") ratio of 1x is worth a mention when the median P/S for the Food industry in Hong Kong is similar at about 0.7x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.
Check out our latest analysis for Honworld Group
What Does Honworld Group's P/S Mean For Shareholders?
For example, consider that Honworld Group's financial performance has been pretty ordinary lately as revenue growth is non-existent. Perhaps the market believes the recent run-of-the-mill revenue performance isn't enough to outperform the industry, which has kept the P/S muted. Those who are bullish on Honworld Group will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.
Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Honworld Group will help you shine a light on its historical performance.What Are Revenue Growth Metrics Telling Us About The P/S?
The only time you'd be comfortable seeing a P/S like Honworld Group's is when the company's growth is tracking the industry closely.
If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. Likewise, not much has changed from three years ago as revenue have been stuck during that whole time. So it seems apparent to us that the company has struggled to grow revenue meaningfully over that time.
This is in contrast to the rest of the industry, which is expected to grow by 4.7% over the next year, materially higher than the company's recent medium-term annualised growth rates.
With this information, we find it interesting that Honworld Group is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.
The Final Word
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.
Our examination of Honworld Group revealed its poor three-year revenue trends aren't resulting in a lower P/S as per our expectations, given they look worse than current industry outlook. Right now we are uncomfortable with the P/S as this revenue performance isn't likely to support a more positive sentiment for long. If recent medium-term revenue trends continue, the probability of a share price decline will become quite substantial, placing shareholders at risk.
Plus, you should also learn about these 3 warning signs we've spotted with Honworld Group (including 2 which are a bit concerning).
If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.