Unpleasant Surprises Could Be In Store For King's Stone Holdings Group Limited's (HKG:1943) Shares

King's Stone Holdings Group Limited's (HKG:1943) price-to-sales (or "P/S") ratio of 1.5x may not look like an appealing investment opportunity when you consider close to half the companies in the Construction industry in Hong Kong have P/S ratios below 0.3x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for King's Stone Holdings Group

How King's Stone Holdings Group Has Been Performing

The revenue growth achieved at King's Stone Holdings Group over the last year would be more than acceptable for most companies. Perhaps the market is expecting this decent revenue performance to beat out the industry over the near term, which has kept the P/S propped up. 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 King's Stone Holdings Group will help you shine a light on its historical performance.

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

In order to justify its P/S ratio, King's Stone Holdings Group would need to produce impressive growth in excess of the industry.

Retrospectively, the last year delivered an exceptional 22% gain to the company's top line. Although, its longer-term performance hasn't been as strong with three-year revenue growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 10% shows it's noticeably less attractive.

In light of this, it's alarming that King's Stone Holdings Group's P/S sits above the majority of other companies. 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.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

The fact that King's Stone Holdings Group 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. 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 the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

Having said that, be aware King's Stone Holdings Group is showing 2 warning signs in our investment analysis, and 1 of those can't be ignored.

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.