Subdued Growth No Barrier To Sanbase Corporation Limited (HKG:8501) With Shares Advancing 26%
Sanbase Corporation Limited (HKG:8501) 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 last 30 days bring the annual gain to a very sharp 54%.
Although its price has surged higher, it's still not a stretch to say that Sanbase's price-to-sales (or "P/S") ratio of 0.2x right now seems quite "middle-of-the-road" compared to the Construction industry in Hong Kong, where the median P/S ratio is around 0.4x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.
See our latest analysis for Sanbase
What Does Sanbase's P/S Mean For Shareholders?
With revenue growth that's exceedingly strong of late, Sanbase 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 you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.
Although there are no analyst estimates available for Sanbase, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.Is There Some Revenue Growth Forecasted For Sanbase?
There's an inherent assumption that a company should be matching the industry for P/S ratios like Sanbase's to be considered reasonable.
Retrospectively, the last year delivered an exceptional 51% gain to the company's top line. Although, its longer-term performance hasn't been as strong with three-year revenue growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.
This is in contrast to the rest of the industry, which is expected to grow by 20% over the next year, materially higher than the company's recent medium-term annualised growth rates.
With this information, we find it interesting that Sanbase is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.
What Does Sanbase's P/S Mean For Investors?
Sanbase's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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.
Our examination of Sanbase 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. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.
You should always think about risks. Case in point, we've spotted 3 warning signs for Sanbase you should be aware of, and 1 of them can't be ignored.
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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