Optimistic Investors Push Vietnam Manufacturing and Export Processing (Holdings) Limited (HKG:422) Shares Up 54% But Growth Is Lacking

Vietnam Manufacturing and Export Processing (Holdings) Limited (HKG:422) shares have continued their recent momentum with a 54% gain in the last month alone. The last month tops off a massive increase of 136% in the last year.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Vietnam Manufacturing and Export Processing (Holdings)'s P/S ratio of 0.5x, since the median price-to-sales (or "P/S") ratio for the Auto industry in Hong Kong is also close to 0.6x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

View our latest analysis for Vietnam Manufacturing and Export Processing (Holdings)

What Does Vietnam Manufacturing and Export Processing (Holdings)'s P/S Mean For Shareholders?

With revenue growth that's exceedingly strong of late, Vietnam Manufacturing and Export Processing (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 you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

Although there are no analyst estimates available for Vietnam Manufacturing and Export Processing (Holdings), take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Do Revenue Forecasts Match The P/S Ratio?

The only time you'd be comfortable seeing a P/S like Vietnam Manufacturing and Export Processing (Holdings)'s is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered an exceptional 43% gain to the company's top line. Pleasingly, revenue has also lifted 34% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenue over that time.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 38% shows it's noticeably less attractive.

With this information, we find it interesting that Vietnam Manufacturing and Export Processing (Holdings) is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Final Word

Vietnam Manufacturing and Export Processing (Holdings)'s stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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.

We've established that Vietnam Manufacturing and Export Processing (Holdings)'s average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. If recent medium-term revenue trends continue, the probability of a share price decline will become quite substantial, placing shareholders at risk.

Plus, you should also learn about this 1 warning sign we've spotted with Vietnam Manufacturing and Export Processing (Holdings).

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.