Subdued Growth No Barrier To China New Consumption Group Limited (HKG:8275) With Shares Advancing 28%

China New Consumption Group Limited (HKG:8275) shares have had a really impressive month, gaining 28% 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 40% over that time.

Although its price has surged higher, there still wouldn't be many who think China New Consumption Group's price-to-sales (or "P/S") ratio of 0.5x is worth a mention when the median P/S in Hong Kong's Construction industry is similar at about 0.3x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

Check out our latest analysis for China New Consumption Group

What Does China New Consumption Group's P/S Mean For Shareholders?

China New Consumption Group certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. Perhaps the market is expecting future revenue performance to taper off, which has kept the P/S from rising. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction 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 China New Consumption Group's earnings, revenue and cash flow.

Is There Some Revenue Growth Forecasted For China New Consumption Group?

The only time you'd be comfortable seeing a P/S like China New Consumption Group's is when the company's growth is tracking the industry closely.

Taking a look back first, we see that the company grew revenue by an impressive 36% last year. The latest three year period has also seen a 19% overall rise in revenue, aided extensively by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 8.9% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

In light of this, it's curious that China New Consumption Group's P/S sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

The Bottom Line On China New Consumption Group's P/S

China New Consumption Group's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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 China New Consumption Group's average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. Right now we are uncomfortable with the P/S as this revenue performance isn't likely to support a more positive sentiment for long. If recent medium-term revenue trends continue, the probability of a share price decline will become quite substantial, placing shareholders at risk.

You should always think about risks. Case in point, we've spotted 4 warning signs for China New Consumption Group you should be aware of, and 3 of them are significant.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.