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Hung Fook Tong Group Holdings Limited (HKG:1446) shareholders would be excited to see that the share price has had a great month, posting a 28% gain and recovering from prior weakness. Taking a wider view, although not as strong as the last month, the full year gain of 13% is also fairly reasonable.

Although its price has surged higher, when close to half the companies operating in Hong Kong's Beverage industry have price-to-sales ratios (or "P/S") above 2x, you may still consider Hung Fook Tong Group Holdings as an enticing stock to check out with its 0.2x P/S ratio. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Hung Fook Tong Group Holdings

What Does Hung Fook Tong Group Holdings' P/S Mean For Shareholders?

For example, consider that Hung Fook Tong Group Holdings' financial performance has been poor lately as its revenue has been in decline. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

Do Revenue Forecasts Match The Low P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as low as Hung Fook Tong Group Holdings' is when the company's growth is on track to lag the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 4.3%. This means it has also seen a slide in revenue over the longer-term as revenue is down 7.7% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 8.8% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we understand why Hung Fook Tong Group Holdings' P/S is lower than most of its industry peers. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

What We Can Learn From Hung Fook Tong Group Holdings' P/S?

The latest share price surge wasn't enough to lift Hung Fook Tong Group Holdings' P/S close to the industry median. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Hung Fook Tong Group Holdings revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. Given the current circumstances, it seems unlikely that the share price will experience any significant movement in either direction in the near future if recent medium-term revenue trends persist.

You should always think about risks. Case in point, we've spotted 3 warning signs for Hung Fook Tong Group Holdings you should be aware of, and 1 of them can't be ignored.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.