Why We're Not Concerned About The Hongkong and Shanghai Hotels, Limited's (HKG:45) Share Price

When close to half the companies in the Hospitality industry in Hong Kong have price-to-sales ratios (or "P/S") below 0.8x, you may consider The Hongkong and Shanghai Hotels, Limited (HKG:45) as a stock to potentially avoid with its 1.3x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

See our latest analysis for Hongkong and Shanghai Hotels

How Has Hongkong and Shanghai Hotels Performed Recently?

Recent times have been quite advantageous for Hongkong and Shanghai Hotels as its revenue has been rising very briskly. It seems that many are expecting the strong revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

How Is Hongkong and Shanghai Hotels' Revenue Growth Trending?

Hongkong and Shanghai Hotels' P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Taking a look back first, we see that the company grew revenue by an impressive 93% last year. The latest three year period has also seen an excellent 199% overall rise in revenue, aided by its short-term performance. 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 20% 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 Hongkong and Shanghai Hotels' 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.

What Does Hongkong and Shanghai Hotels' P/S Mean For Investors?

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.

As we suspected, our examination of Hongkong and Shanghai Hotels revealed its three-year revenue trends are contributing to its high P/S, given they look better than current industry expectations. Right now shareholders are comfortable with the P/S as they are quite confident revenue aren't under threat. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Hongkong and Shanghai Hotels (of which 2 can't be ignored!) you should know about.

If you're unsure about the strength of Hongkong and Shanghai Hotels' 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.