Century Group International Holdings Limited (HKG:2113) shareholders have had their patience rewarded with a 29% share price jump in the last month.    Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 27% over that time.  

Following the firm bounce in price, you could be forgiven for thinking Century Group International Holdings is a stock not worth researching with a price-to-sales ratios (or "P/S") of 0.9x, considering almost half the companies in Hong Kong's Construction industry have P/S ratios below 0.3x.   Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.  

SEHK:2113 Price to Sales Ratio vs Industry March 13th 2024

What Does Century Group International Holdings' Recent Performance Look Like?

As an illustration, revenue has deteriorated at Century Group International Holdings over the last year, which is not ideal at all.   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.  However, if this isn't the case, investors might get caught out paying too much for the stock.    

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Century Group International Holdings' earnings, revenue and cash flow.  

Is There Enough Revenue Growth Forecasted For Century Group International Holdings?  

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

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 63%.   The last three years don't look nice either as the company has shrunk revenue by 60% in aggregate.  Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.  

In contrast to the company, the rest of the industry is expected to grow by 12% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that Century Group International Holdings' P/S exceeds that of its industry peers.  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 Key Takeaway

The large bounce in Century Group International Holdings' shares has lifted the company's P/S handsomely.      While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our examination of Century Group International 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.  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.  Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.    

We don't want to rain on the parade too much, but we did also find 4 warning signs for Century Group International Holdings (3 can't be ignored!) that you need to be mindful of.  

If you're unsure about the strength of Century Group International Holdings' 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.