Some Confidence Is Lacking In SPT Energy Group Inc. (HKG:1251) As Shares Slide 25%

The SPT Energy Group Inc. (HKG:1251) share price has fared very poorly over the last month, falling by a substantial 25%. Looking at the bigger picture, even after this poor month the stock is up 27% in the last year.

Even after such a large drop in price, you could still be forgiven for feeling indifferent about SPT Energy Group's P/S ratio of 0.2x, since the median price-to-sales (or "P/S") ratio for the Energy Services industry in Hong Kong is also close to 0.5x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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Check out our latest analysis for SPT Energy Group

What Does SPT Energy Group's Recent Performance Look Like?

For example, consider that SPT Energy Group's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on SPT Energy Group's earnings, revenue and cash flow.

How Is SPT Energy Group's Revenue Growth Trending?

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

Retrospectively, the last year delivered a frustrating 11% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 4.1% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 11% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's somewhat alarming that SPT Energy Group's P/S sits in line with the majority of other companies. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

What We Can Learn From SPT Energy Group's P/S?

SPT Energy Group's plummeting stock price has brought its P/S back to a similar region as the rest of the industry. 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.

We find it unexpected that SPT Energy Group trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

And what about other risks? Every company has them, and we've spotted 2 warning signs for SPT Energy Group (of which 1 can't be ignored!) you should know about.

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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.