China Hongbao Holdings Limited (HKG:8316) shares have had a really impressive month, gaining 30% after a shaky period beforehand. But the last month did very little to improve the 83% share price decline over the last year.

After such a large jump in price, given close to half the companies operating in Hong Kong's Construction industry have price-to-sales ratios (or "P/S") below 0.3x, you may consider China Hongbao Holdings as a stock to potentially avoid with its 1.7x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

How Has China Hongbao Holdings Performed Recently?

For example, consider that China Hongbao 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. However, if this isn't the case, investors might get caught out paying too much for the stock.

How Is China Hongbao Holdings' Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as high as China Hongbao Holdings' is when the company's growth is on track to outshine the industry.

Retrospectively, the last year delivered a frustrating 3.8% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 6.7% 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 9.9% 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 China Hongbao Holdings' 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 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 Bottom Line On China Hongbao Holdings' P/S

China Hongbao Holdings' P/S is on the rise since its shares have risen strongly. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that China Hongbao Holdings currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 6 warning signs with China Hongbao Holdings (at least 3 which are concerning), and understanding these should be part of your investment process.

If these risks are making you reconsider your opinion on China Hongbao 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.