To the annoyance of some shareholders, Luk Hing Entertainment Group Holdings Limited (HKG:8052) shares are down a considerable 31% in the last month, which continues a horrid run for the company. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 74% loss during that time.

Following the heavy fall in price, considering around half the companies operating in Hong Kong's Hospitality industry have price-to-sales ratios (or "P/S") above 0.9x, you may consider Luk Hing Entertainment Group Holdings as an solid investment opportunity 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.

What Does Luk Hing Entertainment Group Holdings' Recent Performance Look Like?

With revenue growth that's exceedingly strong of late, Luk Hing Entertainment Group Holdings has been doing very well. One possibility is that the P/S ratio is low because investors think this strong revenue growth might actually underperform the broader industry in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Do Revenue Forecasts Match The Low P/S Ratio?

In order to justify its P/S ratio, Luk Hing Entertainment Group Holdings would need to produce sluggish growth that's trailing the industry.

Retrospectively, the last year delivered an exceptional 64% gain to the company's top line. However, this wasn't enough as the latest three year period has seen the company endure a nasty 41% drop in revenue in aggregate. 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 19% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's understandable that Luk Hing Entertainment Group Holdings' P/S would sit below the majority of other companies. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

What We Can Learn From Luk Hing Entertainment Group Holdings' P/S?

The southerly movements of Luk Hing Entertainment Group Holdings' shares means its P/S is now sitting at a pretty low level. 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.

It's no surprise that Luk Hing Entertainment Group Holdings maintains its low P/S off the back of its sliding revenue over the medium-term. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. If recent medium-term revenue trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

Having said that, be aware Luk Hing Entertainment Group Holdings is showing 6 warning signs in our investment analysis, and 4 of those are potentially serious.

If you're unsure about the strength of Luk Hing Entertainment Group Holdings' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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.