Investors Appear Satisfied With Galaxy Entertainment Group Limited's (HKG:27) Prospects

Galaxy Entertainment Group Limited's (HKG:27) price-to-sales (or "P/S") ratio of 8.1x may look like a poor investment opportunity when you consider close to half the companies in the Hospitality industry in Hong Kong have P/S ratios below 1x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for Galaxy Entertainment Group

What Does Galaxy Entertainment Group's P/S Mean For Shareholders?

Recent times have been advantageous for Galaxy Entertainment Group as its revenues have been rising faster than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.

Keen to find out how analysts think Galaxy Entertainment Group's future stacks up against the industry? In that case, our free report is a great place to start.

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Galaxy Entertainment Group's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 33% gain to the company's top line. However, this wasn't enough as the latest three year period has seen the company endure a nasty 35% drop in revenue in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 42% each year during the coming three years according to the analysts following the company. Meanwhile, the rest of the industry is forecast to only expand by 26% each year, which is noticeably less attractive.

With this in mind, it's not hard to understand why Galaxy Entertainment Group's P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

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 Galaxy Entertainment Group maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Hospitality industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.

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

If you're unsure about the strength of Galaxy Entertainment Group'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.