King Of Catering (Global) Holdings Ltd. (HKG:8619) shares have retraced a considerable 26% in the last month, reversing a fair amount of their solid recent performance. Nonetheless, the last 30 days have barely left a scratch on the stock's annual performance, which is up a whopping 411%.

Although its price has dipped substantially, when almost half of the companies in Hong Kong's Professional Services industry have price-to-sales ratios (or "P/S") below 0.4x, you may still consider King Of Catering (Global) Holdings as a stock not worth researching with its 3.1x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

What Does King Of Catering (Global) Holdings' P/S Mean For Shareholders?

The revenue growth achieved at King Of Catering (Global) Holdings over the last year would be more than acceptable for most companies. 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. If not, then existing shareholders may be a little nervous about the viability of the share price.

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

There's an inherent assumption that a company should far outperform the industry for P/S ratios like King Of Catering (Global) Holdings' to be considered reasonable.

Retrospectively, the last year delivered an exceptional 16% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 31% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Comparing that to the industry, which is predicted to deliver 11% growth in the next 12 months, the company's momentum is pretty similar based on recent medium-term annualised revenue results.

With this in mind, we find it intriguing that King Of Catering (Global) Holdings' P/S exceeds that of its industry peers. It seems most investors are ignoring the fairly average recent growth rates and are willing to pay up for exposure to the stock. Nevertheless, they may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Key Takeaway

King Of Catering (Global) Holdings' shares may have suffered, but its P/S remains high. 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.

We didn't expect to see King Of Catering (Global) Holdings trade at such a high P/S considering its last three-year revenue growth has only been on par with the rest of the industry. Right now we are uncomfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 4 warning signs for King Of Catering (Global) Holdings (1 is a bit unpleasant!) that we have uncovered.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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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