To the annoyance of some shareholders, SMIT Holdings Limited (HKG:2239) shares are down a considerable 27% in the last month, which continues a horrid run for the company. For any long-term shareholders, the last month ends a year to forget by locking in a 62% share price decline.
Even after such a large drop in price, you could still be forgiven for thinking SMIT Holdings is a stock not worth researching with a price-to-sales ratios (or "P/S") of 1.3x, considering almost half the companies in Hong Kong's Electronic industry have P/S ratios below 0.4x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.
See our latest analysis for SMIT Holdings
How SMIT Holdings Has Been Performing
For instance, SMIT Holdings' receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.
Although there are no analyst estimates available for SMIT 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 SMIT Holdings' Revenue Growth Trending?
SMIT Holdings' P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.
In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 24%. This means it has also seen a slide in revenue over the longer-term as revenue is down 41% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.
In contrast to the company, the rest of the industry is expected to grow by 20% over the next year, which really puts the company's recent medium-term revenue decline into perspective.
With this information, we find it concerning that SMIT Holdings is trading at a P/S higher than the industry. 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. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.
The Key Takeaway
Despite the recent share price weakness, SMIT Holdings' P/S remains higher than most other companies in 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.
We've established that SMIT Holdings currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. 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.
We don't want to rain on the parade too much, but we did also find 1 warning sign for SMIT Holdings that you need to be mindful of.
If these risks are making you reconsider your opinion on SMIT Holdings, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com