Maxicity Holdings Limited's (HKG:2295) 43% Price Boost Is Out Of Tune With Revenues

Maxicity Holdings Limited (HKG:2295) shareholders would be excited to see that the share price has had a great month, posting a 43% gain and recovering from prior weakness. Looking further back, the 25% 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 Maxicity Holdings is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 6.4x, considering almost half the companies in Hong Kong's Construction industry have P/S ratios below 0.3x. 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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See our latest analysis for Maxicity Holdings

What Does Maxicity Holdings' P/S Mean For Shareholders?

Revenue has risen firmly for Maxicity Holdings recently, which is pleasing to see. One possibility is that the P/S ratio is high because investors think this respectable revenue growth will be enough to outperform the broader industry in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

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

Do Revenue Forecasts Match The High P/S Ratio?

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

Retrospectively, the last year delivered an exceptional 22% gain to the company's top line. However, this wasn't enough as the latest three year period has seen the company endure a nasty 30% drop in revenue in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 8.6% 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 Maxicity 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. 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.

The Final Word

Shares in Maxicity Holdings have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

We've established that Maxicity Holdings currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. 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.

You need to take note of risks, for example - Maxicity Holdings has 2 warning signs (and 1 which can't be ignored) we think you should know about.

If you're unsure about the strength of Maxicity Holdings' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.