Why Investors Shouldn't Be Surprised By Pan Asia Environmental Protection Group Limited's (HKG:556) P/S

Pan Asia Environmental Protection Group Limited's (HKG:556) price-to-sales (or "P/S") ratio of 1x may not look like an appealing investment opportunity when you consider close to half the companies in the Commercial Services industry in Hong Kong have P/S ratios below 0.4x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Pan Asia Environmental Protection Group

What Does Pan Asia Environmental Protection Group's P/S Mean For Shareholders?

Pan Asia Environmental Protection Group certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. It seems that many are expecting the strong revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Pan Asia Environmental Protection Group will help you shine a light on its historical performance.

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Pan Asia Environmental Protection Group's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 161% gain to the company's top line. Pleasingly, revenue has also lifted 230% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Comparing that to the industry, which is only predicted to deliver 6.7% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised revenue results.

In light of this, it's understandable that Pan Asia Environmental Protection Group's P/S sits above the majority of other companies. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Key Takeaway

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.

We've established that Pan Asia Environmental Protection Group maintains its high P/S on the strength of its recent three-year growth being higher than the wider industry forecast, as expected. At this stage investors feel the potential continued revenue growth in the future is great enough to warrant an inflated P/S. If recent medium-term revenue trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

You always need to take note of risks, for example - Pan Asia Environmental Protection Group has 2 warning signs we think you should be aware of.

If you're unsure about the strength of Pan Asia Environmental Protection 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.