Why Investors Shouldn't Be Surprised By Shanghai XNG Holdings Limited's (HKG:3666) 31% Share Price Plunge

Unfortunately for some shareholders, the Shanghai XNG Holdings Limited (HKG:3666) share price has dived 31% in the last thirty days, prolonging recent pain. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 44% share price drop.

Since its price has dipped substantially, given about half the companies operating in Hong Kong's Hospitality industry have price-to-sales ratios (or "P/S") above 0.9x, you may consider Shanghai XNG Holdings as an attractive investment with its 0.1x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

Check out our latest analysis for Shanghai XNG Holdings

How Shanghai XNG Holdings Has Been Performing

Shanghai XNG Holdings certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. One possibility is that the P/S ratio is low because investors think this strong revenue growth might actually underperform the broader industry in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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

Do Revenue Forecasts Match The Low P/S Ratio?

In order to justify its P/S ratio, Shanghai XNG Holdings would need to produce sluggish growth that's trailing the industry.

Retrospectively, the last year delivered an exceptional 38% 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 30% drop in revenue in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

In contrast to the company, the rest of the industry is expected to grow by 19% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we are not surprised that Shanghai XNG Holdings is trading at a P/S lower than the industry. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Key Takeaway

The southerly movements of Shanghai XNG Holdings' shares means its P/S is now sitting at a pretty low level. 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 Shanghai XNG Holdings maintains its low P/S off the back of its sliding revenue over the medium-term. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Given the current circumstances, it seems unlikely that the share price will experience any significant movement in either direction in the near future if recent medium-term revenue trends persist.

You should always think about risks. Case in point, we've spotted 2 warning signs for Shanghai XNG Holdings you should be aware of.

If these risks are making you reconsider your opinion on Shanghai XNG Holdings, 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.