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Despite an already strong run, Chuanglian Holdings Limited (HKG:2371) shares have been powering on, with a gain of 26% in the last thirty days. Notwithstanding the latest gain, the annual share price return of 9.1% isn't as impressive.

In spite of the firm bounce in price, it would still be understandable if you think Chuanglian Holdings is a stock with good investment prospects with a price-to-sales ratios (or "P/S") of 0.3x, considering almost half the companies in Hong Kong's Consumer Services industry have P/S ratios above 1.1x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

View our latest analysis for Chuanglian Holdings

How Chuanglian Holdings Has Been Performing

Recent times have been quite advantageous for Chuanglian Holdings as its revenue has been rising very briskly. Perhaps the market is expecting future revenue performance to dwindle, which has kept the P/S suppressed. Those who are bullish on Chuanglian Holdings will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

What Are Revenue Growth Metrics Telling Us About The Low P/S?

Chuanglian Holdings' P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

Taking a look back first, we see that the company grew revenue by an impressive 49% last year. The strong recent performance means it was also able to grow revenue by 160% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

When compared to the industry's one-year growth forecast of 20%, the most recent medium-term revenue trajectory is noticeably more alluring

With this information, we find it odd that Chuanglian Holdings is trading at a P/S lower than the industry. It looks like most investors are not convinced the company can maintain its recent growth rates.

What Does Chuanglian Holdings' P/S Mean For Investors?

The latest share price surge wasn't enough to lift Chuanglian Holdings' P/S close to the industry median. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We're very surprised to see Chuanglian Holdings currently trading on a much lower than expected P/S since its recent three-year growth is higher than the wider industry forecast. When we see strong revenue with faster-than-industry growth, we assume there are some significant underlying risks to the company's ability to make money which is applying downwards pressure on the P/S ratio. While recent revenue trends over the past medium-term suggest that the risk of a price decline is low, investors appear to perceive a likelihood of revenue fluctuations in the future.

You should always think about risks. Case in point, we've spotted 3 warning signs for Chuanglian Holdings you should be aware of, and 2 of them are significant.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.