Despite an already strong run, Hop Fung Group Holdings Limited (HKG:2320) shares have been powering on, with a gain of 26% in the last thirty days. Unfortunately, despite the strong performance over the last month, the full year gain of 8.7% isn't as attractive.
Even after such a large jump in price, it's still not a stretch to say that Hop Fung Group Holdings' price-to-sales (or "P/S") ratio of 0.4x right now seems quite "middle-of-the-road" compared to the Packaging industry in Hong Kong, where the median P/S ratio is around 0.8x. 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:2320 Price to Sales Ratio vs Industry July 4th 2024
How Hop Fung Group Holdings Has Been Performing
For instance, Hop Fung Group Holdings' receding revenue in recent times would have to be some food for thought. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. If not, then existing shareholders may be a little 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 Hop Fung Group Holdings' earnings, revenue and cash flow.
Do Revenue Forecasts Match The P/S Ratio?
In order to justify its P/S ratio, Hop Fung Group Holdings would need to produce growth that's similar to the industry.
In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 47%. This means it has also seen a slide in revenue over the longer-term as revenue is down 78% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.
Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 20% shows it's an unpleasant look.
In light of this, it's somewhat alarming that Hop Fung Group Holdings' 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. There's a 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 Hop Fung Group Holdings' P/S
Hop Fung Group Holdings appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.
Our look at Hop Fung Group Holdings revealed its shrinking revenues over the medium-term haven't impacted the P/S as much as we anticipated, given the industry is set to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more 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.
Plus, you should also learn about these 4 warning signs we've spotted with Hop Fung Group Holdings (including 2 which don't sit too well with us).
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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Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
