After Leaping 50% Magnificent Hotel Investments Limited (HKG:201) Shares Are Not Flying Under The Radar

Magnificent Hotel Investments Limited (HKG:201) shares have had a really impressive month, gaining 50% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 20% in the last twelve months.

Since its price has surged higher, you could be forgiven for thinking Magnificent Hotel Investments is a stock not worth researching with a price-to-sales ratios (or "P/S") of 2.1x, considering almost half the companies in Hong Kong's Hospitality industry have P/S ratios below 0.9x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Magnificent Hotel Investments

How Magnificent Hotel Investments Has Been Performing

Revenue has risen at a steady rate over the last year for Magnificent Hotel Investments, which is generally not a bad outcome. One possibility is that the P/S ratio is high because investors think this good revenue growth will be enough to outperform the broader industry in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

Although there are no analyst estimates available for Magnificent Hotel Investments, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Magnificent Hotel Investments?

The only time you'd be truly comfortable seeing a P/S as high as Magnificent Hotel Investments' is when the company's growth is on track to outshine the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 2.8%. Pleasingly, revenue has also lifted 102% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

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 consideration, it's not hard to understand why Magnificent Hotel Investments' P/S is high relative to its industry peers. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Key Takeaway

The large bounce in Magnificent Hotel Investments' shares has lifted the company's P/S handsomely. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

It's no surprise that Magnificent Hotel Investments can support its high P/S given the strong revenue growth its experienced over the last three-year is superior to the current industry outlook. Right now shareholders are comfortable with the P/S as they are quite confident revenue aren't under threat. If recent medium-term revenue trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 1 warning sign for Magnificent Hotel Investments you should be aware of.

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.