Lai Group Holding Company Limited (HKG:8455) shares have retraced a considerable 50% in the last month, reversing a fair amount of their solid recent performance. Of course, over the longer-term many would still wish they owned shares as the stock's price has soared 133% in the last twelve months.
In spite of the heavy fall in price, it's still not a stretch to say that Lai Group Holding's price-to-sales (or "P/S") ratio of 0.5x right now seems quite "middle-of-the-road" compared to the Consumer Services industry in Hong Kong, where the median P/S ratio is around 1x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
Check out our latest analysis for Lai Group Holding
How Lai Group Holding Has Been Performing
As an illustration, revenue has deteriorated at Lai Group Holding over the last year, which is not ideal at all. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.
We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Lai Group Holding's earnings, revenue and cash flow.Is There Some Revenue Growth Forecasted For Lai Group Holding?
There's an inherent assumption that a company should be matching the industry for P/S ratios like Lai Group Holding's to be considered reasonable.
Retrospectively, the last year delivered a frustrating 4.5% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 34% 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 14% over the next year, which really puts the company's recent medium-term revenue decline into perspective.
With this in mind, we find it worrying that Lai Group Holding's P/S exceeds that of its industry peers. 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 Bottom Line On Lai Group Holding's P/S
Lai Group Holding's plummeting stock price has brought its P/S back to a similar region as the rest of the industry. 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.
The fact that Lai Group Holding currently trades at a P/S on par with the rest of the industry is surprising to us since its recent revenues have been in decline over the medium-term, all while the industry is set to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. 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.
It is also worth noting that we have found 4 warning signs for Lai Group Holding (3 make us uncomfortable!) that you need to take into consideration.
If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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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.