China Best Group Holding Limited (HKG:370) shareholders have had their patience rewarded with a 124% share price jump in the last month. Notwithstanding the latest gain, the annual share price return of 4.9% isn't as impressive.
After such a large jump in price, you could be forgiven for thinking China Best Group Holding is a stock not worth researching with a price-to-sales ratios (or "P/S") of 2.5x, considering almost half the companies in Hong Kong's Retail Distributors industry have P/S ratios below 0.6x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.
View our latest analysis for China Best Group Holding
What Does China Best Group Holding's P/S Mean For Shareholders?
For example, consider that China Best Group Holding's financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Although there are no analyst estimates available for China Best Group Holding, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.How Is China Best Group Holding's Revenue Growth Trending?
There's an inherent assumption that a company should outperform the industry for P/S ratios like China Best Group Holding's to be considered reasonable.
Retrospectively, the last year delivered a frustrating 57% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 77% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.
Comparing that to the industry, which is predicted to deliver 23% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.
With this information, we find it concerning that China Best Group Holding is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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
The large bounce in China Best Group Holding's shares has lifted the company's P/S handsomely. 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.
We've established that China Best Group Holding currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.
It is also worth noting that we have found 3 warning signs for China Best Group Holding (2 shouldn't be ignored!) that you need to take into consideration.
If these risks are making you reconsider your opinion on China Best Group Holding, 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.