Man Shun Group (Holdings) Limited's (HKG:1746) Shares Climb 28% But Its Business Is Yet to Catch Up

Man Shun Group (Holdings) Limited (HKG:1746) shares have continued their recent momentum with a 28% gain in the last month alone. Looking further back, the 19% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Following the firm bounce in price, you could be forgiven for thinking Man Shun Group (Holdings) is a stock not worth researching with a price-to-sales ratios (or "P/S") of 1.2x, considering almost half the companies in Hong Kong's Construction industry have P/S ratios below 0.3x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

See our latest analysis for Man Shun Group (Holdings)

How Man Shun Group (Holdings) Has Been Performing

Revenue has risen firmly for Man Shun Group (Holdings) recently, which is pleasing to see. It might be that many expect the respectable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

Is There Enough Revenue Growth Forecasted For Man Shun Group (Holdings)?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Man Shun Group (Holdings)'s to be considered reasonable.

Retrospectively, the last year delivered an exceptional 22% gain to the company's top line. As a result, it also grew revenue by 20% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 10% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this information, we find it concerning that Man Shun Group (Holdings) is trading at a P/S higher than the industry. 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. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What We Can Learn From Man Shun Group (Holdings)'s P/S?

The large bounce in Man Shun Group (Holdings)'s shares has lifted the company's P/S handsomely. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

The fact that Man Shun Group (Holdings) currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Man Shun Group (Holdings) (at least 1 which is concerning), and understanding these should be part of your investment process.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com