Why Investors Shouldn't Be Surprised By Pan Asia Environmental Protection Group Limited's (HKG:556) 30% Share Price Surge

Pan Asia Environmental Protection Group Limited (HKG:556) shares have continued their recent momentum with a 30% gain in the last month alone. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 9.9% over the last year.

Since its price has surged higher, when almost half of the companies in Hong Kong's Commercial Services industry have price-to-sales ratios (or "P/S") below 0.5x, you may consider Pan Asia Environmental Protection Group as a stock probably not worth researching with its 1.5x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Pan Asia Environmental Protection Group

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

With revenue growth that's exceedingly strong of late, Pan Asia Environmental Protection Group has been doing very well. 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 Pan Asia Environmental Protection Group's earnings, revenue and cash flow.

How Is Pan Asia Environmental Protection Group's Revenue Growth Trending?

Pan Asia Environmental Protection Group's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Taking a look back first, we see that the company grew revenue by an impressive 42% last year. The latest three year period has also seen an incredible overall rise in revenue, aided by its incredible short-term performance. Accordingly, shareholders would have been over the moon with those medium-term rates of revenue growth.

Comparing that recent medium-term revenue trajectory with the industry's one-year growth forecast of 7.5% shows it's noticeably more attractive.

With this in consideration, it's not hard to understand why Pan Asia Environmental Protection Group's P/S is high relative to its industry peers. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

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

Pan Asia Environmental Protection Group shares have taken a big step in a northerly direction, but its P/S is elevated as a result. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

It's no surprise that Pan Asia Environmental Protection Group can support its high P/S given the strong revenue growth its experienced over the last three-year is superior to the current industry outlook. At this stage investors feel the potential continued revenue growth in the future is great enough to warrant an inflated P/S. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

It is also worth noting that we have found 4 warning signs for Pan Asia Environmental Protection Group (1 shouldn't be ignored!) that you need to take into consideration.

If these risks are making you reconsider your opinion on Pan Asia Environmental Protection Group, 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.