To the annoyance of some shareholders, Golden Solar New Energy Technology Holdings Limited (HKG:1121) shares are down a considerable 36% in the last month, which continues a horrid run for the company. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 66% loss during that time.
Although its price has dipped substantially, given around half the companies in Hong Kong's Luxury industry have price-to-sales ratios (or "P/S") below 0.6x, you may still consider Golden Solar New Energy Technology Holdings as a stock to avoid entirely with its 13x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.
See our latest analysis for Golden Solar New Energy Technology Holdings
What Does Golden Solar New Energy Technology Holdings' P/S Mean For Shareholders?
The revenue growth achieved at Golden Solar New Energy Technology Holdings over the last year would be more than acceptable for most companies. Perhaps the market is expecting this decent revenue performance to beat out the industry over the near term, which has kept the P/S propped up. However, if this isn't the case, investors might get caught out paying too much for the stock.
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 Golden Solar New Energy Technology Holdings' earnings, revenue and cash flow.What Are Revenue Growth Metrics Telling Us About The High P/S?
The only time you'd be truly comfortable seeing a P/S as steep as Golden Solar New Energy Technology Holdings' is when the company's growth is on track to outshine the industry decidedly.
Taking a look back first, we see that the company managed to grow revenues by a handy 7.7% last year. This was backed up an excellent period prior to see revenue up by 164% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenues over that time.
When compared to the industry's one-year growth forecast of 13%, the most recent medium-term revenue trajectory is noticeably more alluring
In light of this, it's understandable that Golden Solar New Energy Technology Holdings' P/S sits above the majority of other companies. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the wider industry.
The Key Takeaway
Even after such a strong price drop, Golden Solar New Energy Technology Holdings' P/S still exceeds the industry median significantly. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
As we suspected, our examination of Golden Solar New Energy Technology Holdings revealed its three-year revenue trends are contributing to its high P/S, given they look better than current industry expectations. In the eyes of shareholders, the probability of a continued growth trajectory is great enough to prevent the P/S from pulling back. Barring any significant changes to the company's ability to make money, the share price should continue to be propped up.
You need to take note of risks, for example - Golden Solar New Energy Technology Holdings has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.
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.