Kidztech Holdings Limited (HKG:6918) shares have retraced a considerable 32% in the last month, reversing a fair amount of their solid recent performance. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 85% loss during that time.
Although its price has dipped substantially, you could still be forgiven for feeling indifferent about Kidztech Holdings' P/S ratio of 0.8x, since the median price-to-sales (or "P/S") ratio for the Leisure industry in Hong Kong is also close to 0.6x. 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.
View our latest analysis for Kidztech Holdings
How Has Kidztech Holdings Performed Recently?
Revenue has risen firmly for Kidztech Holdings recently, which is pleasing to see. One possibility is that the P/S is moderate because investors think this respectable revenue growth might not be enough to outperform the broader industry in the near future. Those who are bullish on Kidztech Holdings will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.
Although there are no analyst estimates available for Kidztech Holdings, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.Do Revenue Forecasts Match The P/S Ratio?
In order to justify its P/S ratio, Kidztech Holdings would need to produce growth that's similar to the industry.
Retrospectively, the last year delivered a decent 8.0% gain to the company's revenues. Still, lamentably revenue has fallen 56% in aggregate from three years ago, which is disappointing. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.
In contrast to the company, the rest of the industry is expected to grow by 10% 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 Kidztech Holdings is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.
What We Can Learn From Kidztech Holdings' P/S?
With its share price dropping off a cliff, the P/S for Kidztech Holdings looks to be in line with the rest of the Leisure industry. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
Our look at Kidztech Holdings revealed its shrinking revenues over the medium-term haven't impacted the P/S as much as we anticipated, given the industry is set to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.
Plus, you should also learn about these 4 warning signs we've spotted with Kidztech Holdings (including 3 which are significant).
If these risks are making you reconsider your opinion on Kidztech 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.