C-Link Squared Limited's (HKG:1463) Shares Climb 40% But Its Business Is Yet to Catch Up

C-Link Squared Limited (HKG:1463) shares have had a really impressive month, gaining 40% after a shaky period beforehand. Taking a wider view, although not as strong as the last month, the full year gain of 16% is also fairly reasonable.

Since its price has surged higher, given around half the companies in Hong Kong's Professional Services industry have price-to-sales ratios (or "P/S") below 0.6x, you may consider C-Link Squared as a stock to avoid entirely with its 24.4x 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.

See our latest analysis for C-Link Squared

How Has C-Link Squared Performed Recently?

As an illustration, revenue has deteriorated at C-Link Squared over the last year, which is not ideal at all. 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. However, if this isn't the case, investors might get caught out paying too much for the stock.

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 C-Link Squared's earnings, revenue and cash flow.

How Is C-Link Squared's Revenue Growth Trending?

C-Link Squared's 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 a frustrating 16% decrease to the company's top line. Even so, admirably revenue has lifted 38% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 18% shows it's noticeably less attractive.

In light of this, it's alarming that C-Link Squared's P/S sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. 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 C-Link Squared's P/S Mean For Investors?

The strong share price surge has lead to C-Link Squared's P/S soaring as well. 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.

The fact that C-Link Squared currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. 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. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

Before you settle on your opinion, we've discovered 3 warning signs for C-Link Squared (1 is potentially serious!) that you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.