Subdued Growth No Barrier To Longhui International Holdings Limited (HKG:1007) With Shares Advancing 39%

Longhui International Holdings Limited (HKG:1007) shares have continued their recent momentum with a 39% gain in the last month alone. The last 30 days were the cherry on top of the stock's 352% gain in the last year, which is nothing short of spectacular.

Following the firm bounce in price, you could be forgiven for thinking Longhui International Holdings is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 7.3x, considering almost half the companies in Hong Kong's Hospitality industry have P/S ratios below 0.8x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for Longhui International Holdings

What Does Longhui International Holdings' Recent Performance Look Like?

The revenue growth achieved at Longhui International Holdings over the last year would be more than acceptable for most companies. It might be that many expect the respectable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

Do Revenue Forecasts Match The High P/S Ratio?

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

Taking a look back first, we see that the company managed to grow revenues by a handy 14% last year. Still, lamentably revenue has fallen 55% in aggregate from three years ago, which is disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 19% shows it's an unpleasant look.

With this information, we find it concerning that Longhui International Holdings 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. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Final Word

The strong share price surge has lead to Longhui International Holdings' P/S soaring as well. 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.

We've established that Longhui International Holdings currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

Having said that, be aware Longhui International Holdings is showing 4 warning signs in our investment analysis, and 3 of those can't be ignored.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.

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