AOM International Group Company Limited's (HKG:381) 28% Cheaper Price Remains In Tune With Revenues

AOM International Group Company Limited (HKG:381) shares have retraced a considerable 28% in the last month, reversing a fair amount of their solid recent performance. Nonetheless, the last 30 days have barely left a scratch on the stock's annual performance, which is up a whopping 603%.

Even after such a large drop in price, you could still be forgiven for thinking AOM International Group is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 2.7x, considering almost half the companies in Hong Kong's Leisure industry have P/S ratios below 0.7x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for AOM International Group

What Does AOM International Group's P/S Mean For Shareholders?

For example, consider that AOM International Group's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.

Although there are no analyst estimates available for AOM International Group, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is AOM International Group's Revenue Growth Trending?

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

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 1.4%. Even so, admirably revenue has lifted 64% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

When compared to the industry's one-year growth forecast of 9.9%, the most recent medium-term revenue trajectory is noticeably more alluring

With this in consideration, it's not hard to understand why AOM International Group's P/S is high relative to its industry peers. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the wider industry.

What We Can Learn From AOM International Group's P/S?

Even after such a strong price drop, AOM International Group's P/S still exceeds the industry median significantly. 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.

As we suspected, our examination of AOM International Group revealed its three-year revenue trends are contributing to its high P/S, given they look better than current industry expectations. In the eyes of shareholders, the probability of a continued growth trajectory is great enough to prevent the P/S from pulling back. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with AOM International Group (at least 3 which make us uncomfortable), and understanding them should be part of your investment process.

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.

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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.