Revenues Not Telling The Story For China Hongbao Holdings Limited (HKG:8316) After Shares Rise 57%

China Hongbao Holdings Limited (HKG:8316) shareholders are no doubt pleased to see that the share price has bounced 57% in the last month, although it is still struggling to make up recently lost ground. The annual gain comes to 136% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, you could be forgiven for thinking China Hongbao Holdings is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 9.8x, considering almost half the companies in Hong Kong's Construction industry have P/S ratios below 0.4x. 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.

View our latest analysis for China Hongbao Holdings

How Has China Hongbao Holdings Performed Recently?

China Hongbao Holdings certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. The P/S ratio is probably high because investors think this strong revenue growth will be enough to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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 Hongbao Holdings' earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For China Hongbao Holdings?

China Hongbao Holdings' P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered an exceptional 31% gain to the company's top line. Still, revenue has fallen 7.8% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 15% shows it's an unpleasant look.

With this information, we find it concerning that China Hongbao 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 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.

What Does China Hongbao Holdings' P/S Mean For Investors?

Shares in China Hongbao Holdings have seen a strong upwards swing lately, which has really helped boost its P/S figure. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We've established that China Hongbao Holdings currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

And what about other risks? Every company has them, and we've spotted 5 warning signs for China Hongbao Holdings (of which 3 are concerning!) you should know about.

If these risks are making you reconsider your opinion on China Hongbao Holdings, 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.