AB Builders Group Limited's (HKG:1615) 26% Share Price Plunge Could Signal Some Risk

The AB Builders Group Limited (HKG:1615) share price has fared very poorly over the last month, falling by a substantial 26%. Looking back over the past twelve months the stock has been a solid performer regardless, with a gain of 13%.

In spite of the heavy fall in price, when almost half of the companies in Hong Kong's Construction industry have price-to-sales ratios (or "P/S") below 0.3x, you may still consider AB Builders Group as a stock probably not worth researching with its 1.1x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

View our latest analysis for AB Builders Group

What Does AB Builders Group's P/S Mean For Shareholders?

For instance, AB Builders Group's receding revenue in recent times would have to be some food for thought. 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 AB Builders Group's earnings, revenue and cash flow.

How Is AB Builders Group's Revenue Growth Trending?

AB Builders Group's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 9.3%. The last three years don't look nice either as the company has shrunk revenue by 29% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 9.4% 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 AB Builders Group'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.

What Does AB Builders Group's P/S Mean For Investors?

AB Builders Group's P/S remain high even after its stock plunged. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of AB Builders Group 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. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you take the next step, you should know about the 2 warning signs for AB Builders Group (1 is potentially serious!) that we have uncovered.

If you're unsure about the strength of AB Builders Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.