There wouldn't be many who think Shun Tak Holdings Limited's (HKG:242) price-to-sales (or "P/S") ratio of 0.4x is worth a mention when the median P/S for the Real Estate industry in Hong Kong is similar at about 0.7x. 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 Shun Tak Holdings
What Does Shun Tak Holdings' Recent Performance Look Like?
Shun Tak Holdings certainly has been doing a good job lately as it's been growing revenue more than most other companies. It might be that many expect the strong revenue performance to wane, which has kept the P/S ratio from rising. If the company manages to stay the course, then investors should be rewarded with a share price that matches its revenue figures.
Keen to find out how analysts think Shun Tak Holdings' future stacks up against the industry? In that case, our free report is a great place to start.Do Revenue Forecasts Match The P/S Ratio?
The only time you'd be comfortable seeing a P/S like Shun Tak Holdings' is when the company's growth is tracking the industry closely.
Taking a look back first, we see that the company grew revenue by an impressive 55% last year. The latest three year period has also seen a 27% overall rise in revenue, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing revenue over that time.
Shifting to the future, estimates from the only analyst covering the company suggest revenue growth is heading into negative territory, declining 6.9% over the next year. With the industry predicted to deliver 5.1% growth, that's a disappointing outcome.
In light of this, it's somewhat alarming that Shun Tak Holdings' P/S sits in line with the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as these declining revenues are likely to weigh on the share price eventually.
What Does Shun Tak Holdings' P/S Mean For Investors?
Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.
While Shun Tak Holdings' P/S isn't anything out of the ordinary for companies in the industry, we didn't expect it given forecasts of revenue decline. When we see a gloomy outlook like this, our immediate thoughts are that the share price is at risk of declining, negatively impacting P/S. If the poor revenue outlook tells us one thing, it's that these current price levels could be unsustainable.
Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Shun Tak Holdings that you should be aware of.
It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).
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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.