Zhaobangji Lifestyle Holdings Limited's (HKG:1660) price-to-sales (or "P/S") ratio of 3x may look like a poor investment opportunity when you consider close to half the companies in the Trade Distributors industry in Hong Kong have P/S ratios below 0.4x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.
See our latest analysis for Zhaobangji Lifestyle Holdings
What Does Zhaobangji Lifestyle Holdings' P/S Mean For Shareholders?
As an illustration, revenue has deteriorated at Zhaobangji Lifestyle Holdings over the last year, which is not ideal at all. 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. If not, then existing shareholders may be quite nervous about the viability of the share price.
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 Zhaobangji Lifestyle Holdings' earnings, revenue and cash flow.What Are Revenue Growth Metrics Telling Us About The High P/S?
In order to justify its P/S ratio, Zhaobangji Lifestyle Holdings would need to produce outstanding growth that's well in excess of the industry.
In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 20%. The last three years don't look nice either as the company has shrunk revenue by 13% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.
Comparing that to the industry, which is predicted to deliver 3.8% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.
With this information, we find it concerning that Zhaobangji Lifestyle Holdings is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.
The Bottom Line On Zhaobangji Lifestyle 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.
We've established that Zhaobangji Lifestyle Holdings currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. 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.
Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Zhaobangji Lifestyle Holdings (1 doesn't sit too well with us) you should be aware of.
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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