Mingfa Group (International) Company Limited (HKG:846) shareholders have had their patience rewarded with a 33% share price jump in the last month. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 28% in the last twelve months.
Even after such a large jump in price, there still wouldn't be many who think Mingfa Group (International)'s price-to-sales (or "P/S") ratio of 0.1x is worth a mention when the median P/S in Hong Kong's Real Estate industry is similar at about 0.6x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.
SEHK:846 Price to Sales Ratio vs Industry February 9th 2024
How Has Mingfa Group (International) Performed Recently?
For example, consider that Mingfa Group (International)'s financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is moderate because investors think the company might still do enough to be in line with the broader industry in the near future. 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 Mingfa Group (International)'s earnings, revenue and cash flow.
Is There Some Revenue Growth Forecasted For Mingfa Group (International)?
Mingfa Group (International)'s P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.
Retrospectively, the last year delivered a frustrating 20% decrease to the company's top line. As a result, revenue from three years ago have also fallen 38% overall. 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 7.7% shows it's an unpleasant look.
With this in mind, we find it worrying that Mingfa Group (International)'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 Final Word
Its shares have lifted substantially and now Mingfa Group (International)'s P/S is back within range of the industry median. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
We find it unexpected that Mingfa Group (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 recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.
Plus, you should also learn about these 2 warning signs we've spotted with Mingfa Group (International) (including 1 which is a bit unpleasant).
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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