Prosperous Printing Company Limited's (HKG:8385) 39% Price Boost Is Out Of Tune With Revenues

Prosperous Printing Company Limited (HKG:8385) shares have had a really impressive month, gaining 39% after a shaky period beforehand. But the last month did very little to improve the 56% share price decline over the last year.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about Prosperous Printing's P/S ratio of 0.1x, since the median price-to-sales (or "P/S") ratio for the Commercial Services industry in Hong Kong is also close to 0.5x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

See our latest analysis for Prosperous Printing

How Has Prosperous Printing Performed Recently?

For instance, Prosperous Printing's receding revenue in recent times would have to be some food for thought. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. If not, then existing shareholders may be a little nervous about the viability of the share price.

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

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

There's an inherent assumption that a company should be matching the industry for P/S ratios like Prosperous Printing's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 40% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 59% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 5.5% shows it's an unpleasant look.

In light of this, it's somewhat alarming that Prosperous Printing'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.

What We Can Learn From Prosperous Printing's P/S?

Prosperous Printing appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry 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 Prosperous Printing 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. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Having said that, be aware Prosperous Printing is showing 3 warning signs in our investment analysis, you should know about.

If you're unsure about the strength of Prosperous Printing'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.