Those holding China Ocean Group Development Limited (HKG:8047) shares would be relieved that the share price has rebounded 56% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

Following the firm bounce in price, when almost half of the companies in Hong Kong's Logistics industry have price-to-sales ratios (or "P/S") below 0.3x, you may consider China Ocean Group Development as a stock probably not worth researching with its 1x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

What Does China Ocean Group Development's P/S Mean For Shareholders?

China Ocean Group Development has been doing a good job lately as it's been growing revenue at a solid pace. It might be that many expect the respectable revenue performance to beat most other companies over the coming period, which has increased investors' willingness to pay up for the stock. However, if this isn't the case, investors might get caught out paying too much for the stock.

Is There Enough Revenue Growth Forecasted For China Ocean Group Development?

There's an inherent assumption that a company should outperform the industry for P/S ratios like China Ocean Group Development's to be considered reasonable.

If we review the last year of revenue growth, the company posted a worthy increase of 13%. However, this wasn't enough as the latest three year period has seen an unpleasant 65% overall drop in revenue. 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 13% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's alarming that China Ocean Group Development's P/S sits above 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 heavily on the share price eventually.

What Does China Ocean Group Development's P/S Mean For Investors?

The large bounce in China Ocean Group Development's shares has lifted the company's P/S handsomely. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of China Ocean Group Development revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such 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.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for China Ocean Group Development (2 shouldn't be ignored) you should be aware of.

If these risks are making you reconsider your opinion on China Ocean Group Development, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.