China Qidian Guofeng Holdings Limited (HKG:1280) shares have retraced a considerable 29% in the last month, reversing a fair amount of their solid recent performance. The good news is that in the last year, the stock has shone bright like a diamond, gaining 128%.
Although its price has dipped substantially, when almost half of the companies in Hong Kong's Specialty Retail industry have price-to-sales ratios (or "P/S") below 0.3x, you may still consider China Qidian Guofeng Holdings as a stock not worth researching with its 11.4x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.
Check out our latest analysis for China Qidian Guofeng Holdings
How China Qidian Guofeng Holdings Has Been Performing
The revenue growth achieved at China Qidian Guofeng Holdings over the last year would be more than acceptable for most companies. One possibility is that the P/S ratio is high because investors think this respectable revenue growth will be enough to outperform the broader industry in the near future. 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 China Qidian Guofeng Holdings' earnings, revenue and cash flow.Is There Enough Revenue Growth Forecasted For China Qidian Guofeng Holdings?
China Qidian Guofeng Holdings' P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.
Taking a look back first, we see that the company grew revenue by an impressive 28% last year. However, this wasn't enough as the latest three year period has seen the company endure a nasty 11% drop in revenue in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.
Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 13% shows it's an unpleasant look.
In light of this, it's alarming that China Qidian Guofeng Holdings' P/S sits above the majority of other companies. 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 very 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.
The Final Word
China Qidian Guofeng Holdings' shares may have suffered, but its P/S remains high. 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.
We've established that China Qidian Guofeng Holdings currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely 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.
Having said that, be aware China Qidian Guofeng Holdings is showing 3 warning signs in our investment analysis, you should know about.
If you're unsure about the strength of China Qidian Guofeng Holdings' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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.