Zhaobangji Lifestyle Holdings Limited's (HKG:1660) Shares Climb 100% But Its Business Is Yet to Catch Up

Despite an already strong run, Zhaobangji Lifestyle Holdings Limited (HKG:1660) shares have been powering on, with a gain of 100% in the last thirty days. The annual gain comes to 178% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, given around half 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 to avoid entirely with its 16.3x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

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Check out our latest analysis for Zhaobangji Lifestyle Holdings

What Does Zhaobangji Lifestyle Holdings' P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Zhaobangji Lifestyle Holdings over the last year, which is not ideal at all. 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. 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 Zhaobangji Lifestyle Holdings' earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Zhaobangji Lifestyle Holdings would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a frustrating 26% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 27% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 4.3% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we find it worrying that Zhaobangji Lifestyle Holdings' P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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 Does Zhaobangji Lifestyle Holdings' P/S Mean For Investors?

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.

We've established that Zhaobangji Lifestyle Holdings currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. 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. 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.

Having said that, be aware Zhaobangji Lifestyle Holdings is showing 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored.

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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.