The Gemilang International Limited (HKG:6163) share price has done very well over the last month, posting an excellent gain of 28%. Looking further back, the 16% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.
Even after such a large jump in price, there still wouldn't be many who think Gemilang International's price-to-sales (or "P/S") ratio of 0.4x is worth a mention when the median P/S in Hong Kong's Machinery industry is similar at about 0.7x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.
View our latest analysis for Gemilang International
How Gemilang International Has Been Performing
With revenue growth that's exceedingly strong of late, Gemilang International has been doing very well. Perhaps the market is expecting future revenue performance to taper off, which has kept the P/S from rising. Those who are bullish on Gemilang International will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.
Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Gemilang International will help you shine a light on its historical performance.Is There Some Revenue Growth Forecasted For Gemilang International?
The only time you'd be comfortable seeing a P/S like Gemilang International's is when the company's growth is tracking the industry closely.
Retrospectively, the last year delivered an exceptional 61% gain to the company's top line. However, this wasn't enough as the latest three year period has seen the company endure a nasty 32% drop in revenue in aggregate. 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 16% shows it's an unpleasant look.
In light of this, it's somewhat alarming that Gemilang International's P/S sits in line with the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.
The Final Word
Its shares have lifted substantially and now Gemilang International's P/S is back within range of 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 find it unexpected that Gemilang International trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.
And what about other risks? Every company has them, and we've spotted 4 warning signs for Gemilang International (of which 3 are potentially serious!) you should know about.
It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).
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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.