Stock Analysis

There's Reason For Concern Over Zhaobangji Lifestyle Holdings Limited's (HKG:1660) Massive 33% Price Jump

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Zhaobangji Lifestyle Holdings Limited (HKG:1660) shares have had a really impressive month, gaining 33% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 17% in the last twelve months.

Following the firm bounce in price, you could be forgiven for thinking Zhaobangji Lifestyle Holdings is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 5.3x, considering almost half the companies in Hong Kong's Trade Distributors industry have P/S ratios below 0.6x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Zhaobangji Lifestyle Holdings

SEHK:1660 Price to Sales Ratio vs Industry April 11th 2024

How Zhaobangji Lifestyle Holdings Has Been Performing

Zhaobangji Lifestyle Holdings has been doing a decent job lately as it's been growing revenue at a reasonable pace. One possibility is that the P/S ratio is high because investors think this good revenue growth will be enough to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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 Zhaobangji Lifestyle Holdings' earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Zhaobangji Lifestyle Holdings?

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

Taking a look back first, we see that the company managed to grow revenues by a handy 7.3% last year. The latest three year period has also seen a 22% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 22% shows it's noticeably less attractive.

With this in mind, we find it worrying that Zhaobangji Lifestyle Holdings' P/S exceeds that of its industry peers. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What We Can Learn From Zhaobangji Lifestyle Holdings' P/S?

Zhaobangji Lifestyle 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 Zhaobangji Lifestyle Holdings revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Zhaobangji Lifestyle Holdings, and understanding should be part of your investment process.

If these risks are making you reconsider your opinion on Zhaobangji Lifestyle Holdings, explore our interactive list of high quality stocks to get an idea of what else is out there.

Valuation is complex, but we're helping make it simple.

Find out whether Zhaobangji Lifestyle Holdings is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.