Pak Tak International Limited (HKG:2668) shareholders that were waiting for something to happen have been dealt a blow with a 48% share price drop in the last month. Regardless, last month's decline is barely a blip on the stock's price chart as it has gained a monstrous 765% in the last year.

Although its price has dipped substantially, you could still be forgiven for thinking Pak Tak International is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 2.9x, considering almost half the companies in Hong Kong's Luxury industry have P/S ratios below 0.6x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

What Does Pak Tak International's P/S Mean For Shareholders?

With revenue growth that's exceedingly strong of late, Pak Tak International has been doing very well. The P/S ratio is probably high because investors think this strong revenue growth will be enough to outperform the broader industry in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

What Are Revenue Growth Metrics Telling Us About The High P/S?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Pak Tak International's to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 66% last year. However, this wasn't enough as the latest three year period has seen the company endure a nasty 70% drop in revenue in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 12% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this information, we find it concerning that Pak Tak International 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.

What We Can Learn From Pak Tak International's P/S?

A significant share price dive has done very little to deflate Pak Tak International's very lofty P/S. 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 Pak Tak International 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. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

There are also other vital risk factors to consider and we've discovered 4 warning signs for Pak Tak International (3 shouldn't be ignored!) that you should be aware of before investing here.

If these risks are making you reconsider your opinion on Pak Tak International, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.