Zhaobangji Lifestyle Holdings Limited (HKG:1660) Stock Rockets 86% As Investors Are Less Pessimistic Than Expected

Zhaobangji Lifestyle Holdings Limited (HKG:1660) shares have had a really impressive month, gaining 86% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 41%.

Following the firm bounce in price, when almost half of the companies in Hong Kong's Trade Distributors industry have price-to-sales ratios (or "P/S") below 0.5x, you may consider Zhaobangji Lifestyle Holdings as a stock not worth researching with its 6.5x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

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View our latest analysis for Zhaobangji Lifestyle Holdings

How Has Zhaobangji Lifestyle Holdings Performed Recently?

For example, consider that Zhaobangji Lifestyle Holdings' financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Zhaobangji Lifestyle Holdings will help you shine a light on its historical performance.

What Are Revenue Growth Metrics Telling Us About The High P/S?

Zhaobangji Lifestyle Holdings' P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much 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 26%. This means it has also seen a slide in revenue over the longer-term as revenue is down 27% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 5.2% shows it's an unpleasant look.

In light of this, it's alarming that Zhaobangji Lifestyle 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.

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

The strong share price surge has lead to Zhaobangji Lifestyle Holdings' P/S soaring as well. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Zhaobangji Lifestyle 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 the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

It is also worth noting that we have found 2 warning signs for Zhaobangji Lifestyle Holdings (1 can't be ignored!) that you need to take into consideration.

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.

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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.