Simplicity Holding Limited (HKG:8367) May Have Run Too Fast Too Soon With Recent 29% Price Plummet

Unfortunately for some shareholders, the Simplicity Holding Limited (HKG:8367) share price has dived 29% in the last thirty days, prolonging recent pain. Looking at the bigger picture, even after this poor month the stock is up 27% in the last year.

Although its price has dipped substantially, given close to half the companies operating in Hong Kong's Hospitality industry have price-to-sales ratios (or "P/S") below 1.7x, you may still consider Simplicity Holding as a stock to potentially avoid with its 3x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Simplicity Holding

What Does Simplicity Holding's P/S Mean For Shareholders?

Revenue has risen at a steady rate over the last year for Simplicity Holding, which is generally not a bad outcome. One possibility is that the P/S ratio is high because investors think this good revenue growth will be enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Simplicity Holding will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For Simplicity Holding?

The only time you'd be truly comfortable seeing a P/S as high as Simplicity Holding's is when the company's growth is on track to outshine the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 5.8%. However, this wasn't enough as the latest three year period has seen an unpleasant 29% overall drop in revenue. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 65% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that Simplicity Holding is trading at a P/S higher than the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What We Can Learn From Simplicity Holding's P/S?

Simplicity Holding's P/S remain high even after its stock plunged. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Simplicity Holding currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

You always need to take note of risks, for example - Simplicity Holding has 3 warning signs we think you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.