Unfortunately for some shareholders, the Moody Technology Holdings Limited (HKG:1400) share price has dived 38% in the last thirty days, prolonging recent pain. For any long-term shareholders, the last month ends a year to forget by locking in a 96% share price decline.

Although its price has dipped substantially, you could still be forgiven for thinking Moody Technology Holdings is a stock not worth researching with a price-to-sales ratios (or "P/S") of 1.4x, considering almost half the companies in Hong Kong's Luxury industry have P/S ratios below 0.7x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

How Moody Technology Holdings Has Been Performing

With revenue growth that's exceedingly strong of late, Moody Technology Holdings has been doing very well. It seems that many are expecting the strong revenue performance to beat most other companies over the coming period, which has increased investors' willingness to pay up for the stock. However, if this isn't the case, investors might get caught out paying too much for the stock.

How Is Moody Technology Holdings' Revenue Growth Trending?

In order to justify its P/S ratio, Moody Technology Holdings would need to produce impressive growth in excess of the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 55%. Still, revenue has fallen 32% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 12% shows it's an unpleasant look.

In light of this, it's alarming that Moody Technology Holdings' P/S sits above 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 very 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.

What Does Moody Technology Holdings' P/S Mean For Investors?

Despite the recent share price weakness, Moody Technology Holdings' P/S remains higher than most other companies in the industry. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Moody Technology Holdings currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

Plus, you should also learn about these 4 warning signs we've spotted with Moody Technology Holdings (including 2 which are potentially serious).

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.

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