When close to half the companies in the Food industry in Hong Kong have price-to-sales ratios (or "P/S") below 0.5x, you may consider Dekon Food and Agriculture Group (HKG:2419) as a stock to potentially avoid with its 1x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

What Does Dekon Food and Agriculture Group's P/S Mean For Shareholders?

Dekon Food and Agriculture Group certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. If not, then existing shareholders might be a little nervous about the viability of the share price.

Is There Enough Revenue Growth Forecasted For Dekon Food and Agriculture Group?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Dekon Food and Agriculture Group's to be considered reasonable.

If we review the last year of revenue growth, the company posted a worthy increase of 7.4%. Pleasingly, revenue has also lifted 98% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenues over that time.

Looking ahead now, revenue is anticipated to climb by 23% each year during the coming three years according to the two analysts following the company. Meanwhile, the rest of the industry is forecast to only expand by 5.9% per year, which is noticeably less attractive.

In light of this, it's understandable that Dekon Food and Agriculture Group's P/S sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Dekon Food and Agriculture Group's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Dekon Food and Agriculture Group with six simple checks on some of these key factors.

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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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.