Zhonghua Gas Holdings Limited's (HKG:8246) Shares Climb 33% But Its Business Is Yet to Catch Up

Zhonghua Gas Holdings Limited (HKG:8246) shares have had a really impressive month, gaining 33% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 12% over that time.

Following the firm bounce in price, when almost half of the companies in Hong Kong's Construction industry have price-to-sales ratios (or "P/S") below 0.3x, you may consider Zhonghua Gas Holdings as a stock not worth researching with its 2.6x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Check out our latest analysis for Zhonghua Gas Holdings

What Does Zhonghua Gas Holdings' P/S Mean For Shareholders?

For example, consider that Zhonghua Gas Holdings' financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. 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 Zhonghua Gas Holdings' earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Zhonghua Gas Holdings would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a frustrating 12% decrease to the company's top line. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 7.6% in total. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 13% shows it's noticeably less attractive.

With this information, we find it concerning that Zhonghua Gas 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 Does Zhonghua Gas Holdings' P/S Mean For Investors?

The strong share price surge has lead to Zhonghua Gas Holdings' P/S soaring as well. 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.

Our examination of Zhonghua Gas 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. 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. 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.

Before you settle on your opinion, we've discovered 1 warning sign for Zhonghua Gas Holdings that you should be aware of.

If you're unsure about the strength of Zhonghua Gas 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.