China Success Finance Group Holdings Limited's (HKG:3623) 38% Dip Still Leaving Some Shareholders Feeling Restless Over Its P/SRatio

China Success Finance Group Holdings Limited (HKG:3623) shares have had a horrible month, losing 38% after a relatively good period beforehand. Looking back over the past twelve months the stock has been a solid performer regardless, with a gain of 17%.

Even after such a large drop in price, when almost half of the companies in Hong Kong's Diversified Financial industry have price-to-sales ratios (or "P/S") below 2x, you may still consider China Success Finance Group Holdings as a stock not worth researching with its 6.1x 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 so lofty.

Check out our latest analysis for China Success Finance Group Holdings

What Does China Success Finance Group Holdings' P/S Mean For Shareholders?

Recent times have been quite advantageous for China Success Finance Group Holdings as its revenue has been rising very briskly. The P/S ratio is probably high because investors think this strong 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 China Success Finance Group Holdings will help you shine a light on its historical performance.

How Is China Success Finance Group Holdings' Revenue Growth Trending?

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

Retrospectively, the last year delivered an exceptional 49% gain to the company's top line. Still, revenue has fallen 54% in total from three years ago, which is quite disappointing. 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 17% 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 China Success Finance Group Holdings is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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 China Success Finance Group Holdings' P/S?

A significant share price dive has done very little to deflate China Success Finance Group Holdings' very lofty P/S. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of China Success Finance Group Holdings revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It is also worth noting that we have found 2 warning signs for China Success Finance Group Holdings that you need to take into consideration.

If you're unsure about the strength of China Success Finance Group 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.