Optimistic Investors Push Tesson Holdings Limited (HKG:1201) Shares Up 66% But Growth Is Lacking

Despite an already strong run, Tesson Holdings Limited (HKG:1201) shares have been powering on, with a gain of 66% in the last thirty days. The last month tops off a massive increase of 202% in the last year.

Following the firm bounce in price, you could be forgiven for thinking Tesson Holdings is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 6x, considering almost half the companies in Hong Kong's Electrical industry have P/S ratios below 0.5x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Tesson Holdings

How Has Tesson Holdings Performed Recently?

For example, consider that Tesson Holdings' financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

How Is Tesson Holdings' Revenue Growth Trending?

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

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 15%. The last three years don't look nice either as the company has shrunk revenue by 78% 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 21% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's alarming that Tesson Holdings' 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 Bottom Line On Tesson Holdings' P/S

Tesson Holdings' P/S has grown nicely over the last month thanks to a handy boost in the share price. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our examination of Tesson Holdings 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. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

It is also worth noting that we have found 3 warning signs for Tesson Holdings (1 is a bit concerning!) that you need to take into consideration.

If these risks are making you reconsider your opinion on Tesson 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.