Hygieia Group Limited's (HKG:1650) 42% Share Price Surge Not Quite Adding Up

Hygieia Group Limited (HKG:1650) shares have continued their recent momentum with a 42% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 94% in the last year.

In spite of the firm bounce in price, there still wouldn't be many who think Hygieia Group's price-to-sales (or "P/S") ratio of 0.7x is worth a mention when the median P/S in Hong Kong's Commercial Services industry is similar at about 0.5x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

See our latest analysis for Hygieia Group

How Has Hygieia Group Performed Recently?

Revenue has risen at a steady rate over the last year for Hygieia Group, which is generally not a bad outcome. One possibility is that the P/S is moderate because investors think this good revenue growth might only be parallel to the broader industry in the near future. Those who are bullish on Hygieia Group will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

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

What Are Revenue Growth Metrics Telling Us About The P/S?

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

If we review the last year of revenue growth, the company posted a worthy increase of 4.9%. Still, lamentably revenue has fallen 8.4% in aggregate from three years ago, which is disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 6.8% shows it's an unpleasant look.

In light of this, it's somewhat alarming that Hygieia Group's P/S sits in line with the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

The Final Word

Its shares have lifted substantially and now Hygieia Group's P/S is back within range of the industry median. 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.

The fact that Hygieia Group currently trades at a P/S on par with the rest of the industry is surprising to us since its recent revenues have been in decline over the medium-term, all while the industry is set to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you settle on your opinion, we've discovered 5 warning signs for Hygieia Group (1 is significant!) that you should be aware of.

If you're unsure about the strength of Hygieia Group's 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.