Not Many Are Piling Into Melco International Development Limited (HKG:200) Just Yet

You may think that with a price-to-sales (or "P/S") ratio of 0.5x Melco International Development Limited (HKG:200) is a stock worth checking out, seeing as almost half of all the Hospitality companies in Hong Kong have P/S ratios greater than 1x and even P/S higher than 3x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

View our latest analysis for Melco International Development

How Melco International Development Has Been Performing

With revenue growth that's superior to most other companies of late, Melco International Development has been doing relatively well. It might be that many expect the strong revenue performance to degrade substantially, which has repressed the share price, and thus the P/S ratio. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Melco International Development will help you uncover what's on the horizon.

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 Melco International Development's is when the company's growth is on track to lag the industry.

Retrospectively, the last year delivered an exceptional 33% gain to the company's top line. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 42% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Shifting to the future, estimates from the six analysts covering the company suggest revenue should grow by 85% over the next year. With the industry only predicted to deliver 41%, the company is positioned for a stronger revenue result.

In light of this, it's peculiar that Melco International Development's P/S sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Key Takeaway

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.

Melco International Development's analyst forecasts revealed that its superior revenue outlook isn't contributing to its P/S anywhere near as much as we would have predicted. When we see strong growth forecasts like this, we can only assume potential risks are what might be placing significant pressure on the P/S ratio. It appears the market could be anticipating revenue instability, because these conditions should normally provide a boost to the share price.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Melco International Development (1 doesn't sit too well with us!) that you need to be mindful of.

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.