Hongbo Co.,Ltd. (SZSE:002229) Shares May Have Slumped 31% But Getting In Cheap Is Still Unlikely

Hongbo Co.,Ltd. (SZSE:002229) shares have had a horrible month, losing 31% after a relatively good period beforehand. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 56% loss during that time.

Although its price has dipped substantially, when almost half of the companies in China's Commercial Services industry have price-to-sales ratios (or "P/S") below 3.1x, you may still consider HongboLtd as a stock not worth researching with its 9.7x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

View our latest analysis for HongboLtd

How HongboLtd Has Been Performing

For example, consider that HongboLtd's 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. If not, then existing shareholders may be quite nervous about the viability of the share price.

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 HongboLtd's earnings, revenue and cash flow.

How Is HongboLtd's Revenue Growth Trending?

In order to justify its P/S ratio, HongboLtd would need to produce outstanding growth that's well in excess of the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 13%. This has erased any of its gains during the last three years, with practically no change in revenue being achieved in total. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

This is in contrast to the rest of the industry, which is expected to grow by 34% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that HongboLtd is trading at a P/S higher than the industry. 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 good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Bottom Line On HongboLtd's P/S

Even after such a strong price drop, HongboLtd's P/S still exceeds the industry median significantly. 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.

The fact that HongboLtd currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with HongboLtd (at least 1 which can't be ignored), and understanding them should be part of your investment process.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.