Jinhui Holdings Company Limited (HKG:137) shareholders won't be pleased to see that the share price has had a very rough month, dropping 26% and undoing the prior period's positive performance. Longer-term shareholders would now have taken a real hit with the stock declining 3.1% in the last year.
Following the heavy fall in price, given about half the companies operating in Hong Kong's Shipping industry have price-to-sales ratios (or "P/S") above 0.8x, you may consider Jinhui Holdings as an attractive investment with its 0.3x 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 Jinhui Holdings
What Does Jinhui Holdings' Recent Performance Look Like?
With revenue growth that's exceedingly strong of late, Jinhui Holdings has been doing very well. One possibility is that the P/S ratio is low because investors think this strong revenue growth might actually underperform the broader industry in the near future. Those who are bullish on Jinhui Holdings 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 Jinhui Holdings will help you shine a light on its historical performance.Do Revenue Forecasts Match The Low P/S Ratio?
There's an inherent assumption that a company should underperform the industry for P/S ratios like Jinhui Holdings' to be considered reasonable.
Retrospectively, the last year delivered an exceptional 88% gain to the company's top line. Revenue has also lifted 22% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been respectable for the company.
In contrast to the company, the rest of the industry is expected to decline by 8.3% over the next year, which puts the company's recent medium-term positive growth rates in a good light for now.
In light of this, it's quite peculiar that Jinhui Holdings' P/S sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.
The Final Word
The southerly movements of Jinhui Holdings' shares means its P/S is now sitting at a pretty low level. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.
Upon analysing the past data, we see it is unexpected that Jinhui Holdings is currently trading at a lower P/S than the rest of the industry given that its revenue growth in the past three-year years is exceeding expectations in a challenging industry. We think potential risks might be placing significant pressure on the P/S ratio and share price. Amidst challenging industry conditions, perhaps a key concern is whether the company can sustain its superior revenue growth trajectory. At least the risk of a price drop looks to be subdued, but investors think future revenue could see a lot of volatility.
There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Jinhui Holdings that you should be aware of.
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.