The China Ocean Group Development Limited (HKG:8047) share price has fared very poorly over the last month, falling by a substantial 38%.    Longer-term shareholders will rue the drop in the share price, since it's now virtually flat for the year after a promising few quarters.  

In spite of the heavy fall in price, you could still be forgiven for thinking China Ocean Group Development is a stock not worth researching with a price-to-sales ratios (or "P/S") of 1x, considering almost half the companies in Hong Kong's Logistics industry have P/S ratios below 0.2x.   However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.  

SEHK:8047 Price to Sales Ratio vs Industry March 22nd 2024

How China Ocean Group Development Has Been Performing

China Ocean Group Development has been doing a good job lately as it's been growing revenue at a solid pace.   Perhaps the market is expecting this decent revenue performance to beat out the industry over the near term, which has kept the P/S propped up.  You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.    

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

Is There Enough Revenue Growth Forecasted For China Ocean Group Development?  

There's an inherent assumption that a company should outperform the industry for P/S ratios like China Ocean Group Development's to be considered reasonable.  

If we review the last year of revenue growth, the company posted a worthy increase of 13%.   Still, lamentably revenue has fallen 65% in aggregate from three years ago, which is disappointing.  Therefore, it's fair to say the revenue growth recently has been undesirable for the company.  

In contrast to the company, the rest of the industry is expected to grow by 4.8% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that China Ocean Group Development is trading at a P/S higher than the industry.  Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price.  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.  

The Bottom Line On China Ocean Group Development's P/S

China Ocean Group Development's P/S remain high even after its stock plunged.      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.

Our examination of China Ocean Group Development revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow.  When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability.  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.    

We don't want to rain on the parade too much, but we did also find 4 warning signs for China Ocean Group Development (2 are significant!) that you need to be mindful of.  

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.