Subdued Growth No Barrier To Scholar Education Group (HKG:1769) With Shares Advancing 72%

Despite an already strong run, Scholar Education Group (HKG:1769) shares have been powering on, with a gain of 72% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 94% in the last year.

After such a large jump in price, you could be forgiven for thinking Scholar Education Group is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 3.5x, considering almost half the companies in Hong Kong's Consumer Services industry have P/S ratios below 1.3x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Scholar Education Group

How Has Scholar Education Group Performed Recently?

For instance, Scholar Education Group's receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

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

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

Retrospectively, the last year delivered a frustrating 8.7% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 38% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 18% shows it's an unpleasant look.

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

What Does Scholar Education Group's P/S Mean For Investors?

Scholar Education Group's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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 examination of Scholar Education Group revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. 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.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Scholar Education Group that you should be aware of.

If you're unsure about the strength of Scholar Education Group's 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.