The GBA Holdings Limited (HKG:261) share price has fared very poorly over the last month, falling by a substantial 32%. To make matters worse, the recent drop has wiped out a year's worth of gains with the share price now back where it started a year ago.
Even after such a large drop in price, when almost half of the companies in Hong Kong's Communications industry have price-to-sales ratios (or "P/S") below 0.5x, you may still consider GBA Holdings as a stock probably not worth researching with its 1.6x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.
View our latest analysis for GBA Holdings
How GBA Holdings Has Been Performing
With revenue growth that's exceedingly strong of late, GBA Holdings has been doing very well. The P/S ratio is probably high because investors think this strong revenue growth will be enough to outperform the broader industry in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.
Although there are no analyst estimates available for GBA Holdings, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.Is There Enough Revenue Growth Forecasted For GBA Holdings?
In order to justify its P/S ratio, GBA Holdings would need to produce impressive growth in excess of the industry.
Retrospectively, the last year delivered an exceptional 31% gain to the company's top line. Still, revenue has fallen 14% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.
Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 34% shows it's an unpleasant look.
With this information, we find it concerning that GBA Holdings is trading at a P/S higher than the industry. 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.
What Does GBA Holdings' P/S Mean For Investors?
Despite the recent share price weakness, GBA Holdings' P/S remains higher than most other companies in the industry. 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.
Our examination of GBA Holdings revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. 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 recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with GBA Holdings (at least 1 which makes us a bit uncomfortable), and understanding them should be part of your investment process.
If you're unsure about the strength of GBA 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.