What Virtual Mind Holding Company Limited's (HKG:1520) 139% Share Price Gain Is Not Telling You

Despite an already strong run, Virtual Mind Holding Company Limited (HKG:1520) shares have been powering on, with a gain of 139% in the last thirty days. The last 30 days were the cherry on top of the stock's 778% gain in the last year, which is nothing short of spectacular.

Following the firm bounce in price, when almost half of the companies in Hong Kong's Luxury industry have price-to-sales ratios (or "P/S") below 0.7x, you may consider Virtual Mind Holding as a stock not worth researching with its 11.6x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit.

Check out our latest analysis for Virtual Mind Holding

What Does Virtual Mind Holding's Recent Performance Look Like?

Recent times have been quite advantageous for Virtual Mind Holding as its revenue has been rising very briskly. 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

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 Virtual Mind Holding's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Virtual Mind Holding?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Virtual Mind Holding's to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 95% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 7.3% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 41% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that Virtual Mind Holding is trading at a P/S higher than the industry. 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. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Final Word

Virtual Mind Holding's P/S has grown nicely over the last month thanks to a handy boost in the share price. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Virtual Mind Holding currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Virtual Mind Holding that you need to be mindful of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.