There's Reason For Concern Over Melco International Development Limited's (HKG:200) Massive 39% Price Jump

Melco International Development Limited (HKG:200) shareholders would be excited to see that the share price has had a great month, posting a 39% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 15% over that time.

Although its price has surged higher, there still wouldn't be many who think Melco International Development's price-to-sales (or "P/S") ratio of 0.3x is worth a mention when the median P/S in Hong Kong's Hospitality industry is similar at about 0.7x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

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View our latest analysis for Melco International Development

How Has Melco International Development Performed Recently?

Melco International Development certainly has been doing a good job lately as it's been growing revenue more than most other companies. Perhaps the market is expecting this level of performance to taper off, keeping the P/S from soaring. If the company manages to stay the course, then investors should be rewarded with a share price that matches its revenue figures.

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Is There Some Revenue Growth Forecasted For Melco International Development?

Melco International Development's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

Taking a look back first, we see that the company grew revenue by an impressive 22% last year. The strong recent performance means it was also able to grow revenue by 131% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the four analysts covering the company suggest revenue should grow by 5.0% per year over the next three years. That's shaping up to be materially lower than the 13% per annum growth forecast for the broader industry.

With this in mind, we find it intriguing that Melco International Development's P/S is closely matching its industry peers. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Bottom Line On Melco International Development's P/S

Its shares have lifted substantially and now Melco International Development's P/S is back within range of the industry median. 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.

Given that Melco International Development's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Melco International Development, and understanding should be part of your investment process.

If these risks are making you reconsider your opinion on Melco International Development, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.