You may think that with a price-to-sales (or "P/S") ratio of 1.9x CLP Holdings Limited (HKG:2) is a stock worth checking out, seeing as almost half of all the Electric Utilities companies in Hong Kong have P/S ratios greater than 2.8x and even P/S higher than 14x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

What Does CLP Holdings' Recent Performance Look Like?

With revenue that's retreating more than the industry's average of late, CLP Holdings has been very sluggish. Perhaps the market isn't expecting future revenue performance to improve, which has kept the P/S suppressed. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

What Are Revenue Growth Metrics Telling Us About The Low P/S?

There's an inherent assumption that a company should underperform the industry for P/S ratios like CLP Holdings' 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 13%. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 9.5% in total. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

Turning to the outlook, the next three years should generate growth of 1.5% per annum as estimated by the eight analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 8.1% per annum, which is noticeably more attractive.

With this in consideration, its clear as to why CLP Holdings' P/S is falling short industry peers. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From CLP Holdings' P/S?

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that CLP Holdings maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

There are also other vital risk factors to consider before investing and we've discovered 3 warning signs for CLP Holdings that you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.

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