Madison Holdings Group Limited (HKG:8057) shareholders that were waiting for something to happen have been dealt a blow with a 36% share price drop in the last month.    The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 74% loss during that time.  

In spite of the heavy fall in price, there still wouldn't be many who think Madison Holdings Group's price-to-sales (or "P/S") ratio of 0.7x is worth a mention when the median P/S in Hong Kong's Consumer Retailing industry is similar at about 0.6x.  While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.    

SEHK:8057 Price to Sales Ratio vs Industry March 6th 2024

What Does Madison Holdings Group's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Madison Holdings Group over the last year, which is not ideal at all.   Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off.  If not, then existing shareholders may be a little nervous about the viability of the share price.    

Although there are no analyst estimates available for Madison Holdings Group, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.  

How Is Madison Holdings Group's Revenue Growth Trending?  

There's an inherent assumption that a company should be matching the industry for P/S ratios like Madison Holdings Group's to be considered reasonable.  

Retrospectively, the last year delivered a frustrating 29% decrease to the company's top line.   The last three years don't look nice either as the company has shrunk revenue by 31% 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 11% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we find it worrying that Madison Holdings Group's P/S exceeds that of its industry peers.  It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects.  There's a 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 Madison Holdings Group's P/S

Following Madison Holdings Group's share price tumble, its P/S is just clinging on to the industry median 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.

The fact that Madison Holdings Group currently trades at a P/S on par with the rest of the industry is surprising to us since its recent revenues have been in decline over the medium-term, all while the industry is set to grow.  When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower.  If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.    

We don't want to rain on the parade too much, but we did also find 2 warning signs for Madison Holdings Group that you need to be mindful of.  

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

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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.