China Qinfa Group Limited (HKG:866) shares have continued their recent momentum with a 26% gain in the last month alone.    Looking back a bit further, it's encouraging to see the stock is up 26% in the last year.  

Even after such a large jump in price, given about half the companies operating in Hong Kong's Oil and Gas industry have price-to-sales ratios (or "P/S") above 1x, you may still consider China Qinfa Group as an attractive investment with its 0.2x P/S ratio.   However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.  

Check out our latest analysis for China Qinfa Group

SEHK:866 Price to Sales Ratio vs Industry January 21st 2024

How China Qinfa Group Has Been Performing

For example, consider that China Qinfa Group's financial performance has been poor lately as its revenue has been in decline.   One possibility is that the P/S is low because investors think the company won't do enough to avoid underperforming the broader industry in the near future.  Those who are bullish on China Qinfa Group will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.    

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on China Qinfa Group will help you shine a light on its historical performance.  

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

China Qinfa Group's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.  

Retrospectively, the last year delivered a frustrating 27% decrease to the company's top line.   However, a few very strong years before that means that it was still able to grow revenue by an impressive 57% in total over the last three years.  Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.  

This is in contrast to the rest of the industry, which is expected to grow by 0.7% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this in mind, we find it intriguing that China Qinfa Group's P/S isn't as high compared to that of its industry peers.  Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.  

What We Can Learn From China Qinfa Group's P/S?

Despite China Qinfa Group's share price climbing recently, its P/S still lags most other companies.      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 examination of China Qinfa Group revealed its three-year revenue trends aren't boosting its P/S anywhere near as much as we would have predicted, given they look better than current industry expectations.  When we see robust revenue growth that outpaces the industry, we presume that there are notable underlying risks to the company's future performance, which is exerting downward pressure on the P/S ratio.  It appears many are indeed anticipating revenue instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.    

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

If these risks are making you reconsider your opinion on China Qinfa Group, 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.