The SDM Education Group Holdings Limited (HKG:8363) share price has done very well over the last month, posting an excellent gain of 26%. The last month tops off a massive increase of 121% in the last year.

Although its price has surged higher, you could still be forgiven for feeling indifferent about SDM Education Group Holdings' P/S ratio of 0.7x, since the median price-to-sales (or "P/S") ratio for the Consumer Services industry in Hong Kong is also close to 1.1x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

How SDM Education Group Holdings Has Been Performing

SDM Education Group Holdings 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 wane, which has kept the P/S from rising. If that doesn't eventuate, then existing shareholders probably aren't too pessimistic about the future direction of the share price.

How Is SDM Education Group Holdings' Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like SDM Education Group Holdings' to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 22%. The latest three year period has also seen an excellent 79% overall rise in revenue, aided by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

When compared to the industry's one-year growth forecast of 18%, the most recent medium-term revenue trajectory is noticeably more alluring

With this information, we find it interesting that SDM Education Group Holdings is trading at a fairly similar P/S compared to the industry. It may be that most investors are not convinced the company can maintain its recent growth rates.

The Final Word

SDM Education Group Holdings' stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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.

We've established that SDM Education Group Holdings currently trades on a lower than expected P/S since its recent three-year growth is higher than the wider industry forecast. There could be some unobserved threats to revenue preventing the P/S ratio from matching this positive performance. At least the risk of a price drop looks to be subdued if recent medium-term revenue trends continue, but investors seem to think future revenue could see some volatility.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with SDM Education Group Holdings (at least 1 which is a bit unpleasant), and understanding them should be part of your investment process.

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).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com