Some C-Link Squared Limited (HKG:1463) Shareholders Look For Exit As Shares Take 28% Pounding

C-Link Squared Limited (HKG:1463) shares have had a horrible month, losing 28% after a relatively good period beforehand. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 39% share price drop.

Although its price has dipped substantially, 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 still consider C-Link Squared as a stock to avoid entirely with its 19.8x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for C-Link Squared

What Does C-Link Squared's Recent Performance Look Like?

For example, consider that C-Link Squared's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

Although there are no analyst estimates available for C-Link Squared, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For C-Link Squared?

In order to justify its P/S ratio, C-Link Squared would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a frustrating 11% decrease to the company's top line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 22% overall rise in revenue. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

This is in contrast to the rest of the industry, which is expected to grow by 12% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that C-Link Squared's P/S sits above the majority of other companies. 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.

The Final Word

Even after such a strong price drop, C-Link Squared's P/S still exceeds the industry median significantly. 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 see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Plus, you should also learn about these 3 warning signs we've spotted with C-Link Squared (including 1 which is significant).

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com