Hong Kong ChaoShang Group Limited's (HKG:2322) 38% Share Price Surge Not Quite Adding Up

Hong Kong ChaoShang Group Limited (HKG:2322) shareholders would be excited to see that the share price has had a great month, posting a 38% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 28%.

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 0.4x, you may consider Hong Kong ChaoShang Group as a stock not worth researching with its 28.7x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

See our latest analysis for Hong Kong ChaoShang Group

What Does Hong Kong ChaoShang Group's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Hong Kong ChaoShang Group 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 Hong Kong ChaoShang Group's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Hong Kong ChaoShang Group?

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

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 27%. As a result, revenue from three years ago have also fallen 57% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 22% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's alarming that Hong Kong ChaoShang Group's 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. 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 Hong Kong ChaoShang Group's P/S Mean For Investors?

Hong Kong ChaoShang Group's P/S has grown nicely over the last month thanks to a handy boost in the share price. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Hong Kong ChaoShang Group currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Hong Kong ChaoShang Group, and understanding should be part of your investment process.

If these risks are making you reconsider your opinion on Hong Kong ChaoShang Group, 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.