What MGM China Holdings Limited's (HKG:2282) P/S Is Not Telling You

MGM China Holdings Limited's (HKG:2282) price-to-sales (or "P/S") ratio of 2.2x may not look like an appealing investment opportunity when you consider close to half the companies in the Hospitality industry in Hong Kong have P/S ratios below 1x. 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 MGM China Holdings

What Does MGM China Holdings' Recent Performance Look Like?

Recent times have been advantageous for MGM China Holdings as its revenues have been rising faster than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. If not, then existing shareholders might be a little nervous about the viability of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on MGM China Holdings.

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

In order to justify its P/S ratio, MGM China Holdings would need to produce impressive growth in excess of the industry.

Retrospectively, the last year delivered an explosive gain to the company's top line. The amazing performance means it was also able to deliver huge revenue growth over the last three years. Accordingly, shareholders would have been over the moon with those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 12% per annum during the coming three years according to the analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 16% per year, which is noticeably more attractive.

With this information, we find it concerning that MGM China Holdings is trading at a P/S higher than the industry. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Bottom Line On MGM China Holdings' P/S

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.

Despite analysts forecasting some poorer-than-industry revenue growth figures for MGM China Holdings, this doesn't appear to be impacting the P/S in the slightest. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for MGM China Holdings that you should be aware of.

If you're unsure about the strength of MGM China Holdings' 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.