China Maple Leaf Educational Systems Limited (HKG:1317) Could Be Riskier Than It Looks

When close to half the companies operating in the Consumer Services industry in Hong Kong have price-to-sales ratios (or "P/S") above 1.2x, you may consider China Maple Leaf Educational Systems Limited (HKG:1317) as an attractive investment with its 0.7x 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 limited.

See our latest analysis for China Maple Leaf Educational Systems

What Does China Maple Leaf Educational Systems' Recent Performance Look Like?

The revenue growth achieved at China Maple Leaf Educational Systems over the last year would be more than acceptable for most companies. One possibility is that the P/S is low because investors think this respectable revenue growth might actually underperform the broader industry in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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 China Maple Leaf Educational Systems' earnings, revenue and cash flow.

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

The only time you'd be truly comfortable seeing a P/S as low as China Maple Leaf Educational Systems' is when the company's growth is on track to lag the industry.

Taking a look back first, we see that the company grew revenue by an impressive 16% last year. Pleasingly, revenue has also lifted 198% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 19% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this in mind, we find it intriguing that China Maple Leaf Educational Systems' P/S isn't as high compared to that of its industry peers. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Final Word

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of China Maple Leaf Educational Systems revealed its three-year revenue trends aren't boosting its P/S anywhere near as much as we would have predicted, given they look better than current industry expectations. When we see robust revenue growth that outpaces the industry, we presume that there are notable underlying risks to the company's future performance, which is exerting downward pressure on the P/S ratio. At least price risks look to be very low if recent medium-term revenue trends continue, but investors seem to think future revenue could see a lot of volatility.

There are also other vital risk factors to consider and we've discovered 6 warning signs for China Maple Leaf Educational Systems (3 are a bit unpleasant!) that you should be aware of before investing here.

If you're unsure about the strength of China Maple Leaf Educational Systems' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.