Those holding Kingbo Strike Limited (HKG:1421) shares would be relieved that the share price has rebounded 32% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios.    Notwithstanding the latest gain, the annual share price return of 2.6% isn't as impressive.  

Although its price has surged higher, there still wouldn't be many who think Kingbo Strike's price-to-sales (or "P/S") ratio of 0.4x is worth a mention when the median P/S in Hong Kong's Electrical industry is similar at about 0.5x.  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.    

SEHK:1421 Price to Sales Ratio vs Industry March 25th 2024

What Does Kingbo Strike's Recent Performance Look Like?

For instance, Kingbo Strike's receding revenue in recent times would have to be some food for thought.   Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off.  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 Kingbo Strike's earnings, revenue and cash flow.  

Is There Some Revenue Growth Forecasted For Kingbo Strike?  

There's an inherent assumption that a company should be matching the industry for P/S ratios like Kingbo Strike's to be considered reasonable.  

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 30%.   The last three years don't look nice either as the company has shrunk revenue by 78% 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 18% shows it's an unpleasant look.

In light of this, it's somewhat alarming that Kingbo Strike'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.  

What Does Kingbo Strike's P/S Mean For Investors?

Its shares have lifted substantially and now Kingbo Strike'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 Kingbo Strike 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.    

We don't want to rain on the parade too much, but we did also find 5 warning signs for Kingbo Strike (3 don't sit too well with us!) that you need to be mindful of.  

If you're unsure about the strength of Kingbo Strike's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.