Improved Revenues Required Before Strong Petrochemical Holdings Limited (HKG:852) Stock's 123% Jump Looks Justified

Those holding Strong Petrochemical Holdings Limited (HKG:852) shares would be relieved that the share price has rebounded 123% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

Even after such a large jump in price, given about half the companies operating in Hong Kong's Oil and Gas industry have price-to-sales ratios (or "P/S") above 1x, you may still consider Strong Petrochemical Holdings as an attractive investment with its 0.4x P/S ratio. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Strong Petrochemical Holdings

What Does Strong Petrochemical Holdings' P/S Mean For Shareholders?

We'd have to say that with no tangible growth over the last year, Strong Petrochemical Holdings' revenue has been unimpressive. One possibility is that the P/S is low because investors think this benign revenue growth rate will likely underperform the broader industry in the near future. If not, then existing shareholders may be feeling optimistic about the future direction of the share price.

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

How Is Strong Petrochemical Holdings' Revenue Growth Trending?

In order to justify its P/S ratio, Strong Petrochemical Holdings would need to produce sluggish growth that's trailing the industry.

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. Whilst it's an improvement, it wasn't enough to get the company out of the hole it was in, with revenue down 93% overall from three years ago. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 1.0% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's understandable that Strong Petrochemical Holdings' P/S would sit below the majority of other companies. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

What Does Strong Petrochemical Holdings' P/S Mean For Investors?

The latest share price surge wasn't enough to lift Strong Petrochemical Holdings' P/S close to the industry median. 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.

As we suspected, our examination of Strong Petrochemical Holdings revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. Given the current circumstances, it seems unlikely that the share price will experience any significant movement in either direction in the near future if recent medium-term revenue trends persist.

You need to take note of risks, for example - Strong Petrochemical Holdings has 3 warning signs (and 2 which shouldn't be ignored) we think you should know about.

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.