Cool Link (Holdings) Limited's (HKG:8491) 29% Dip Still Leaving Some Shareholders Feeling Restless Over Its P/SRatio

Cool Link (Holdings) Limited (HKG:8491) shares have retraced a considerable 29% in the last month, reversing a fair amount of their solid recent performance. Regardless, last month's decline is barely a blip on the stock's price chart as it has gained a monstrous 332% in the last year.

In spite of the heavy fall in price, given around half the companies in Hong Kong's Consumer Retailing industry have price-to-sales ratios (or "P/S") below 0.6x, you may still consider Cool Link (Holdings) as a stock to avoid entirely with its 4.4x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

See our latest analysis for Cool Link (Holdings)

What Does Cool Link (Holdings)'s P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Cool Link (Holdings) over the last year, which is not ideal at all. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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 Cool Link (Holdings)'s earnings, revenue and cash flow.

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

The only time you'd be truly comfortable seeing a P/S as steep as Cool Link (Holdings)'s is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered a frustrating 9.9% decrease to the company's top line. This has erased any of its gains during the last three years, with practically no change in revenue being achieved in total. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 10% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Cool Link (Holdings) is trading at a P/S higher than the industry. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Key Takeaway

Cool Link (Holdings)'s shares may have suffered, but its P/S remains high. 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.

The fact that Cool Link (Holdings) currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You need to take note of risks, for example - Cool Link (Holdings) has 4 warning signs (and 3 which can't be ignored) we think you should know about.

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.