AOM International Group Company Limited (HKG:381) Stock Rockets 37% As Investors Are Less Pessimistic Than Expected

Those holding AOM International Group Company Limited (HKG:381) shares would be relieved that the share price has rebounded 37% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. The last 30 days were the cherry on top of the stock's 356% gain in the last year, which is nothing short of spectacular.

Since its price has surged higher, you could be forgiven for thinking AOM International Group is a stock not worth researching with a price-to-sales ratios (or "P/S") of 1.4x, considering almost half the companies in Hong Kong's Leisure industry have P/S ratios below 0.7x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

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Check out our latest analysis for AOM International Group

What Does AOM International Group's Recent Performance Look Like?

It looks like revenue growth has deserted AOM International Group recently, which is not something to boast about. Perhaps the market believes that revenue growth will improve markedly over current levels, inflating the P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.

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 AOM International Group's earnings, revenue and cash flow.

How Is AOM International Group's Revenue Growth Trending?

In order to justify its P/S ratio, AOM International Group would need to produce impressive growth in excess of the industry.

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. Fortunately, a few good years before that means that it was still able to grow revenue by 19% in total over the last three years. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Comparing that to the industry, which is predicted to deliver 6.8% growth in the next 12 months, the company's momentum is pretty similar based on recent medium-term annualised revenue results.

With this information, we find it interesting that AOM International Group is trading at a high P/S compared to the industry. It seems most investors are ignoring the fairly average recent growth rates and are willing to pay up for exposure to the stock. Nevertheless, they may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Bottom Line On AOM International Group's P/S

The large bounce in AOM International Group's shares has lifted the company's P/S handsomely. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our look into AOM International Group has shown that it currently trades on a higher than expected P/S since its recent three-year growth is only in line with the wider industry forecast. When we see average revenue with industry-like growth combined with a high P/S, we suspect the share price is at risk of declining, bringing the P/S back in line with the industry too. Unless there is a significant improvement in the company's medium-term trends, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with AOM International Group (at least 2 which shouldn't be ignored), and understanding these should be part of your investment process.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.