More Unpleasant Surprises Could Be In Store For CHYY Development Group Limited's (HKG:8128) Shares After Tumbling 25%

CHYY Development Group Limited (HKG:8128) shares have had a horrible month, losing 25% after a relatively good period beforehand. Indeed, the recent drop has reduced its annual gain to a relatively sedate 3.9% over the last twelve months.

Although its price has dipped substantially, 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 still consider CHYY Development Group as a stock probably not worth researching with its 2.2x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for CHYY Development Group

What Does CHYY Development Group's Recent Performance Look Like?

For example, consider that CHYY Development Group's financial performance has been pretty ordinary lately as revenue growth is non-existent. One possibility is that the P/S is high because investors think the benign revenue growth will improve 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.

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

How Is CHYY Development Group's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as high as CHYY Development Group's is when the company's growth is on track to outshine the industry.

Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. This isn't what shareholders were looking for as it means they've been left with a 64% decline in revenue over the last three years in total. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 7.6% shows it's an unpleasant look.

With this in mind, we find it worrying that CHYY Development Group's P/S exceeds that of its industry peers. 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. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What Does CHYY Development Group's P/S Mean For Investors?

Despite the recent share price weakness, CHYY Development Group's P/S remains higher than most other companies in the industry. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that CHYY Development Group currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

There are also other vital risk factors to consider and we've discovered 2 warning signs for CHYY Development Group (1 is concerning!) that you should be aware of before investing here.

If these risks are making you reconsider your opinion on CHYY Development 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.