Xiabuxiabu Catering Management (China) Holdings Co., Ltd. (HKG:520) shareholders would be excited to see that the share price has had a great month, posting a 53% gain and recovering from prior weakness. Still, the 30-day jump doesn't change the fact that longer term shareholders have seen their stock decimated by the 53% share price drop in the last twelve months.

Although its price has surged higher, you could still be forgiven for feeling indifferent about Xiabuxiabu Catering Management (China) Holdings' P/S ratio of 0.3x, since the median price-to-sales (or "P/S") ratio for the Hospitality industry in Hong Kong is also close to 0.7x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

What Does Xiabuxiabu Catering Management (China) Holdings' Recent Performance Look Like?

With revenue growth that's inferior to most other companies of late, Xiabuxiabu Catering Management (China) Holdings has been relatively sluggish. Perhaps the market is expecting future revenue performance to lift, which has kept the P/S from declining. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

How Is Xiabuxiabu Catering Management (China) Holdings' Revenue Growth Trending?

The only time you'd be comfortable seeing a P/S like Xiabuxiabu Catering Management (China) Holdings' is when the company's growth is tracking the industry closely.

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. Whilst it's an improvement, it wasn't enough to get the company out of the hole it was in, with revenue down 17% overall from three years ago. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Shifting to the future, estimates from the eight analysts covering the company suggest revenue should grow by 11% each year over the next three years. Meanwhile, the rest of the industry is forecast to expand by 14% per annum, which is noticeably more attractive.

With this information, we find it interesting that Xiabuxiabu Catering Management (China) Holdings is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What We Can Learn From Xiabuxiabu Catering Management (China) Holdings' P/S?

Its shares have lifted substantially and now Xiabuxiabu Catering Management (China) Holdings' P/S is back within range of the industry median. 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.

Given that Xiabuxiabu Catering Management (China) Holdings' revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. A positive change is needed in order to justify the current price-to-sales ratio.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Xiabuxiabu Catering Management (China) Holdings, and understanding should be part of your investment process.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.