GCL New Energy Holdings Limited's (HKG:451) 26% Share Price Surge Not Quite Adding Up
GCL New Energy Holdings Limited (HKG:451) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. The annual gain comes to 109% following the latest surge, making investors sit up and take notice.
Even after such a large jump in price, you could still be forgiven for feeling indifferent about GCL New Energy Holdings' P/S ratio of 1.1x, since the median price-to-sales (or "P/S") ratio for the Renewable Energy industry in Hong Kong is also close to 0.8x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.
Check out our latest analysis for GCL New Energy Holdings
How GCL New Energy Holdings Has Been Performing
With revenue growth that's exceedingly strong of late, GCL New Energy Holdings has been doing very well. The P/S is probably moderate because investors think this strong revenue growth might not be enough to outperform the broader industry in the near future. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.
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 GCL New Energy Holdings' earnings, revenue and cash flow.How Is GCL New Energy Holdings' Revenue Growth Trending?
In order to justify its P/S ratio, GCL New Energy Holdings would need to produce growth that's similar to the industry.
Taking a look back first, we see that the company grew revenue by an impressive 40% last year. However, this wasn't enough as the latest three year period has seen the company endure a nasty 13% drop in revenue in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.
Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 9.3% shows it's an unpleasant look.
With this information, we find it concerning that GCL New Energy Holdings is trading at a fairly similar P/S compared to 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 on the share price eventually.
What We Can Learn From GCL New Energy Holdings' P/S?
Its shares have lifted substantially and now GCL New Energy Holdings' P/S is back within range of the industry median. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We find it unexpected that GCL New Energy Holdings trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
You always need to take note of risks, for example - GCL New Energy Holdings has 1 warning sign we think you should be aware of.
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.
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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.