It's Down 28% But Zhidao International (Holdings) Limited (HKG:1220) Could Be Riskier Than It Looks

The Zhidao International (Holdings) Limited (HKG:1220) share price has fared very poorly over the last month, falling by a substantial 28%. Still, a bad month hasn't completely ruined the past year with the stock gaining 87%, which is great even in a bull market.

In spite of the heavy fall in price, you could still be forgiven for feeling indifferent about Zhidao International (Holdings)'s P/S ratio of 0.3x, since the median price-to-sales (or "P/S") ratio for the Construction industry in Hong Kong is about the same. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

View our latest analysis for Zhidao International (Holdings)

How Has Zhidao International (Holdings) Performed Recently?

Zhidao International (Holdings) certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. 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.

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 Zhidao International (Holdings)'s earnings, revenue and cash flow.

Is There Some Revenue Growth Forecasted For Zhidao International (Holdings)?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Zhidao International (Holdings)'s to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 206% last year. Pleasingly, revenue has also lifted 300% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Comparing that to the industry, which is only predicted to deliver 9.5% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised revenue results.

With this information, we find it interesting that Zhidao International (Holdings) is trading at a fairly similar P/S compared to the industry. Apparently some shareholders believe the recent performance is at its limits and have been accepting lower selling prices.

What Does Zhidao International (Holdings)'s P/S Mean For Investors?

Following Zhidao International (Holdings)'s share price tumble, its P/S is just clinging on to the industry median P/S. 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.

We've established that Zhidao International (Holdings) currently trades on a lower than expected P/S since its recent three-year growth is higher than the wider industry forecast. When we see strong revenue with faster-than-industry growth, we can only assume potential risks are what might be placing pressure on the P/S ratio. It appears some are indeed anticipating revenue instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

Before you settle on your opinion, we've discovered 3 warning signs for Zhidao International (Holdings) (1 is concerning!) that you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.