Mexan Limited (HKG:22) Screens Well But There Might Be A Catch

With a median price-to-sales (or "P/S") ratio of close to 0.8x in the Hospitality industry in Hong Kong, you could be forgiven for feeling indifferent about Mexan Limited's (HKG:22) P/S ratio of 0.7x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

View our latest analysis for Mexan

What Does Mexan's P/S Mean For Shareholders?

Mexan certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. Perhaps the market is expecting future revenue performance to taper off, which has kept the P/S from rising. 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 not quite in 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 Mexan's earnings, revenue and cash flow.

Do Revenue Forecasts Match The P/S Ratio?

The only time you'd be comfortable seeing a P/S like Mexan's is when the company's growth is tracking the industry closely.

If we review the last year of revenue growth, the company posted a terrific increase of 244%. The latest three year period has also seen an incredible overall rise in revenue, aided by its incredible short-term performance. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 20% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we find it interesting that Mexan is trading at a fairly similar P/S compared to the industry. Apparently some shareholders believe the recent performance is at its limits and have been accepting lower selling prices.

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.

We've established that Mexan currently trades on a lower than expected P/S since its recent three-year growth is higher than the wider industry forecast. When we see strong revenue with faster-than-industry growth, we can only assume potential risks are what might be placing pressure on the P/S ratio. While recent revenue trends over the past medium-term suggest that the risk of a price decline is low, investors appear to see the likelihood of revenue fluctuations in the future.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Mexan (1 is a bit unpleasant) you should be aware of.

If you're unsure about the strength of Mexan'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.