Fortune Ng Fung Food (Hebei) Co.,Ltd's (SHSE:600965) 36% Price Boost Is Out Of Tune With Revenues

Fortune Ng Fung Food (Hebei) Co.,Ltd (SHSE:600965) shares have had a really impressive month, gaining 36% after a shaky period beforehand. 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.

After such a large jump in price, when almost half of the companies in China's Food industry have price-to-sales ratios (or "P/S") below 1.5x, you may consider Fortune Ng Fung Food (Hebei)Ltd as a stock not worth researching with its 3.9x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for Fortune Ng Fung Food (Hebei)Ltd

How Fortune Ng Fung Food (Hebei)Ltd Has Been Performing

As an illustration, revenue has deteriorated at Fortune Ng Fung Food (Hebei)Ltd over the last year, which is not ideal at all. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Fortune Ng Fung Food (Hebei)Ltd will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For Fortune Ng Fung Food (Hebei)Ltd?

Fortune Ng Fung Food (Hebei)Ltd's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than 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 14%. This means it has also seen a slide in revenue over the longer-term as revenue is down 26% in total over the last three years. 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 16% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's alarming that Fortune Ng Fung Food (Hebei)Ltd's P/S sits above 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. 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 Final Word

Fortune Ng Fung Food (Hebei)Ltd's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

Our examination of Fortune Ng Fung Food (Hebei)Ltd 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. 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. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

Having said that, be aware Fortune Ng Fung Food (Hebei)Ltd is showing 3 warning signs in our investment analysis, and 2 of those make us uncomfortable.

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.