Noble Engineering Group Holdings Limited (HKG:8445) shares have had a really impressive month, gaining 28% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 39% in the last twelve months.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Noble Engineering Group Holdings' P/S ratio of 0.2x, since the median price-to-sales (or "P/S") ratio for the Construction industry in Hong Kong is also close to 0.3x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

What Does Noble Engineering Group Holdings' Recent Performance Look Like?

With revenue growth that's exceedingly strong of late, Noble Engineering Group Holdings has been doing very well. It might be that many expect the strong revenue performance to wane, which has kept the share price, and thus the P/S ratio, from rising. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Is There Some Revenue Growth Forecasted For Noble Engineering Group Holdings?

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

If we review the last year of revenue growth, the company posted a terrific increase of 35%. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 1.8% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

In contrast to the company, the rest of the industry is expected to grow by 9.4% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's somewhat alarming that Noble Engineering Group Holdings' P/S sits in line with 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 on the share price eventually.

The Final Word

Its shares have lifted substantially and now Noble Engineering Group Holdings' P/S is back within range of the industry median. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our look at Noble Engineering Group Holdings revealed its shrinking revenues over the medium-term haven't impacted the P/S as much as we anticipated, given 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.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Noble Engineering Group Holdings you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.