Star Plus Legend Holdings Limited (HKG:6683) shares have continued their recent momentum with a 28% gain in the last month alone. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.
Following the firm bounce in price, given around half the companies in Hong Kong's Food industry have price-to-sales ratios (or "P/S") below 0.6x, you may consider Star Plus Legend Holdings as a stock to avoid entirely with its 21.8x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.
View our latest analysis for Star Plus Legend Holdings
How Star Plus Legend Holdings Has Been Performing
With revenue growth that's superior to most other companies of late, Star Plus Legend Holdings has been doing relatively well. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. If not, then existing shareholders might be a little nervous about the viability of the share price.
Want the full picture on analyst estimates for the company? Then our free report on Star Plus Legend Holdings will help you uncover what's on the horizon.What Are Revenue Growth Metrics Telling Us About The High P/S?
Star Plus Legend Holdings' P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.
If we review the last year of revenue growth, the company posted a terrific increase of 25%. Still, revenue has fallen 5.8% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.
Shifting to the future, estimates from the sole analyst covering the company suggest revenue should grow by 115% over the next year. Meanwhile, the rest of the industry is forecast to only expand by 11%, which is noticeably less attractive.
In light of this, it's understandable that Star Plus Legend Holdings' P/S sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
What Does Star Plus Legend Holdings' P/S Mean For Investors?
The strong share price surge has lead to Star Plus Legend Holdings' P/S soaring as well. 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've established that Star Plus Legend Holdings maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Food industry, as expected. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.
Before you settle on your opinion, we've discovered 2 warning signs for Star Plus Legend Holdings (1 is concerning!) that you should be aware of.
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.