Take Care Before Jumping Onto MIE Holdings Corporation (HKG:1555) Even Though It's 27% Cheaper

MIE Holdings Corporation (HKG:1555) shares have retraced a considerable 27% in the last month, reversing a fair amount of their solid recent performance. Looking at the bigger picture, even after this poor month the stock is up 60% in the last year.

After such a large drop in price, when close to half the companies operating in Hong Kong's Oil and Gas industry have price-to-sales ratios (or "P/S") above 0.8x, you may consider MIE Holdings as an enticing stock to check out with its 0.1x P/S ratio. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

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See our latest analysis for MIE Holdings

What Does MIE Holdings' Recent Performance Look Like?

As an illustration, revenue has deteriorated at MIE Holdings over the last year, which is not ideal at all. Perhaps the market believes the recent revenue performance isn't good enough to keep up the industry, causing the P/S ratio to suffer. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

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

How Is MIE Holdings' Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as low as MIE Holdings' is when the company's growth is on track to lag the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 13%. This means it has also seen a slide in revenue over the longer-term as revenue is down 12% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

It's interesting to note that the rest of the industry is similarly expected to decline by 2.4% over the next year, which is just as bad as the company's recent medium-term revenue decline.

With this information, it's perhaps strange but not a major surprise that MIE Holdings is trading at a lower P/S in comparison. In general, shrinking revenues are unlikely to lead to a stable P/S long-term, which could set up shareholders for future disappointment regardless. There is still potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth, which would be difficult to do with the current industry outlook.

The Key Takeaway

The southerly movements of MIE Holdings' shares means its P/S is now sitting at a pretty low level. 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.

We've established that MIE Holdings currently trades on a lower than expected P/S since its recent three-year revenue growth is no worse than the forecasts for a struggling industry. When we see a revenue growth decline that is on par with its peers, we can only assume potential risks are what might be causing the P/S ratio to be lower than average. One major risk is whether the company can maintain its 'middle of the road' medium-termrevenue growth under these tough industry conditions. It appears some are indeed anticipating revenue instability, because this relative performance should normally provide more support to the share price.

Before you take the next step, you should know about the 3 warning signs for MIE Holdings (2 are potentially serious!) that we have uncovered.

If you're unsure about the strength of MIE 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.