Alpha Professional Holdings Limited (HKG:948) shares have had a really impressive month, gaining 62% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 21% over that time.

After such a large jump in price, given close to half the companies operating in Hong Kong's Electronic industry have price-to-sales ratios (or "P/S") below 0.4x, you may consider Alpha Professional Holdings as a stock to potentially avoid with its 1.5x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

What Does Alpha Professional Holdings' P/S Mean For Shareholders?

For example, consider that Alpha Professional Holdings' financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is Alpha Professional Holdings' Revenue Growth Trending?

Alpha Professional Holdings' P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Retrospectively, the last year delivered a frustrating 73% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 64% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 22% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's alarming that Alpha Professional 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. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Final Word

The large bounce in Alpha Professional Holdings' shares has lifted the company's P/S handsomely. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Alpha Professional Holdings 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. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Before you settle on your opinion, we've discovered 3 warning signs for Alpha Professional Holdings (2 are potentially serious!) that you should be aware of.

If these risks are making you reconsider your opinion on Alpha Professional Holdings, 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.