When close to half the companies in the Energy Services industry in Hong Kong have price-to-sales ratios (or "P/S") below 0.3x, you may consider Dalipal Holdings Limited (HKG:1921) as a stock to potentially avoid with its 1.6x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.
View our latest analysis for Dalipal Holdings
How Dalipal Holdings Has Been Performing
For example, consider that Dalipal Holdings' financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.
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 Dalipal Holdings' earnings, revenue and cash flow.What Are Revenue Growth Metrics Telling Us About The High P/S?
Dalipal 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 25%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 19% overall rise in revenue. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.
This is in contrast to the rest of the industry, which is expected to grow by 12% over the next year, materially higher than the company's recent medium-term annualised growth rates.
With this in mind, we find it worrying that Dalipal Holdings' P/S exceeds that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. 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 Bottom Line On Dalipal Holdings' P/S
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.
Our examination of Dalipal Holdings revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.
You need to take note of risks, for example - Dalipal Holdings has 4 warning signs (and 2 which are concerning) we think you should know about.
If these risks are making you reconsider your opinion on Dalipal 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.