Sino ICT Holdings Limited's (HKG:365) 32% Dip Still Leaving Some Shareholders Feeling Restless Over Its P/SRatio

Sino ICT Holdings Limited (HKG:365) shares have retraced a considerable 32% in the last month, reversing a fair amount of their solid recent performance. Indeed, the recent drop has reduced its annual gain to a relatively sedate 9.8% over the last twelve months.

Although its price has dipped substantially, given close to half the companies operating in Hong Kong's Machinery industry have price-to-sales ratios (or "P/S") below 0.8x, you may still consider Sino ICT Holdings as a stock to potentially avoid with its 1.4x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

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See our latest analysis for Sino ICT Holdings

What Does Sino ICT Holdings' P/S Mean For Shareholders?

Revenue has risen firmly for Sino ICT Holdings recently, which is pleasing to see. 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. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Is There Enough Revenue Growth Forecasted For Sino ICT Holdings?

In order to justify its P/S ratio, Sino ICT Holdings would need to produce impressive growth in excess of the industry.

Retrospectively, the last year delivered an exceptional 19% gain to the company's top line. Still, revenue has barely risen at all from three years ago in total, which is not ideal. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 17% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in mind, we find it worrying that Sino ICT Holdings' P/S exceeds that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates 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.

The Bottom Line On Sino ICT Holdings' P/S

Sino ICT Holdings' P/S remain high even after its stock plunged. 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.

Our examination of Sino ICT Holdings revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. 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. 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 Sino ICT Holdings is showing 4 warning signs in our investment analysis, and 3 of those are concerning.

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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.