Sun Art Retail Group Limited (HKG:6808) shares have continued their recent momentum with a 27% gain in the last month alone. The annual gain comes to 107% following the latest surge, making investors sit up and take notice.
Although its price has surged higher, it's still not a stretch to say that Sun Art Retail Group's price-to-sales (or "P/S") ratio of 0.3x right now seems quite "middle-of-the-road" compared to the Consumer Retailing industry in Hong Kong, where the median P/S ratio is around 0.6x. 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.
Check out our latest analysis for Sun Art Retail Group
How Has Sun Art Retail Group Performed Recently?
Sun Art Retail Group could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. One possibility is that the P/S ratio is moderate because investors think this poor revenue performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.
Want the full picture on analyst estimates for the company? Then our free report on Sun Art Retail Group will help you uncover what's on the horizon.Is There Some Revenue Growth Forecasted For Sun Art Retail Group?
In order to justify its P/S ratio, Sun Art Retail Group would need to produce growth that's similar to the industry.
Retrospectively, the last year delivered a frustrating 9.3% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 27% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.
Looking ahead now, revenue is anticipated to climb by 2.9% during the coming year according to the twelve analysts following the company. With the industry predicted to deliver 10% growth, the company is positioned for a weaker revenue result.
With this information, we find it interesting that Sun Art Retail Group is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.
What Does Sun Art Retail Group's P/S Mean For Investors?
Sun Art Retail Group appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry 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.
When you consider that Sun Art Retail Group's revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Sun Art Retail Group with six simple checks.
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.