When you see that almost half of the companies in the Specialty Retail industry in Hong Kong have price-to-sales ratios (or "P/S") below 0.4x, Sinofortune Financial Holdings Limited (HKG:8123) looks to be giving off some sell signals with its 1x 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.
Check out our latest analysis for Sinofortune Financial Holdings
How Sinofortune Financial Holdings Has Been Performing
For example, consider that Sinofortune Financial Holdings' financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. 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 Sinofortune Financial Holdings, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.Do Revenue Forecasts Match The High P/S Ratio?
The only time you'd be truly comfortable seeing a P/S as high as Sinofortune Financial Holdings' is when the company's growth is on track to outshine the industry.
In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 58%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 281% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.
Comparing that recent medium-term revenue trajectory with the industry's one-year growth forecast of 34% shows it's noticeably more attractive.
With this in consideration, it's not hard to understand why Sinofortune Financial Holdings' P/S is high relative to its industry peers. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the wider industry.
The Bottom Line On Sinofortune Financial Holdings' P/S
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.
As we suspected, our examination of Sinofortune Financial Holdings revealed its three-year revenue trends are contributing to its high P/S, given they look better than current industry expectations. At this stage investors feel the potential continued revenue growth in the future is great enough to warrant an inflated P/S. Barring any significant changes to the company's ability to make money, the share price should continue to be propped up.
Plus, you should also learn about this 1 warning sign we've spotted with Sinofortune Financial Holdings.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.