Pinning Down SJM Holdings Limited's (HKG:880) P/S Is Difficult Right Now

It's not a stretch to say that SJM Holdings Limited's (HKG:880) price-to-sales (or "P/S") ratio of 0.7x seems quite "middle-of-the-road" for Hospitality companies in Hong Kong, seeing as it matches the P/S ratio of the wider industry. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for SJM Holdings

What Does SJM Holdings' P/S Mean For Shareholders?

SJM Holdings certainly has been doing a good job lately as it's been growing revenue more than most other companies. Perhaps the market is expecting this level of performance to taper off, keeping the P/S from soaring. If the company manages to stay the course, then investors should be rewarded with a share price that matches its revenue figures.

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

How Is SJM Holdings' Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like SJM Holdings' to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 119% last year. Pleasingly, revenue has also lifted 212% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 11% per year as estimated by the ten analysts watching the company. That's shaping up to be materially lower than the 14% per annum growth forecast for the broader industry.

In light of this, it's curious that SJM Holdings' P/S sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Bottom Line On SJM Holdings' P/S

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Given that SJM Holdings' revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.

Having said that, be aware SJM Holdings is showing 1 warning sign in our investment analysis, you should know about.

If you're unsure about the strength of SJM 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.