To the annoyance of some shareholders, Asia Cement (China) Holdings Corporation (HKG:743) shares are down a considerable 27% in the last month, which continues a horrid run for the company. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 32% share price drop.
Although its price has dipped substantially, you could still be forgiven for feeling indifferent about Asia Cement (China) Holdings' P/S ratio of 0.5x, since the median price-to-sales (or "P/S") ratio for the Basic Materials industry in Hong Kong is about the same. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
See our latest analysis for Asia Cement (China) Holdings
How Asia Cement (China) Holdings Has Been Performing
Asia Cement (China) Holdings has been struggling lately as its revenue has declined faster than most other companies. Perhaps the market is expecting future revenue performance to begin matching the rest of the industry, which has kept the P/S from declining. If you still like the company, you'd want its revenue trajectory to turn around before making any decisions. Or at the very least, you'd be hoping it doesn't keep underperforming if your plan is to pick up some stock while it's not in favour.
Want the full picture on analyst estimates for the company? Then our free report on Asia Cement (China) Holdings will help you uncover what's on the horizon.How Is Asia Cement (China) Holdings' Revenue Growth Trending?
In order to justify its P/S ratio, Asia Cement (China) Holdings would need to produce growth that's similar to the industry.
Retrospectively, the last year delivered a frustrating 31% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 49% in aggregate. 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 5.9% over the next year. That's shaping up to be materially lower than the 12% growth forecast for the broader industry.
With this information, we find it interesting that Asia Cement (China) Holdings is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.
What We Can Learn From Asia Cement (China) Holdings' P/S?
With its share price dropping off a cliff, the P/S for Asia Cement (China) Holdings looks to be in line with the rest of the Basic Materials 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.
Given that Asia Cement (China) Holdings' revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
We don't want to rain on the parade too much, but we did also find 1 warning sign for Asia Cement (China) Holdings that you need to be mindful of.
Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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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.