Unpleasant Surprises Could Be In Store For China Modern Dairy Holdings Ltd.'s (HKG:1117) Shares

It's not a stretch to say that China Modern Dairy Holdings Ltd.'s (HKG:1117) price-to-sales (or "P/S") ratio of 0.5x seems quite "middle-of-the-road" for Food companies in Hong Kong, seeing as it matches the P/S ratio of the wider industry. 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.

View our latest analysis for China Modern Dairy Holdings

What Does China Modern Dairy Holdings' Recent Performance Look Like?

China Modern Dairy Holdings' negative revenue growth of late has neither been better nor worse than most other companies. It seems that few are expecting the company's revenue performance to deviate much from most other companies, which has held the P/S back. You'd much rather the company improve its revenue if you still believe in the business. In saying that, existing shareholders probably aren't too pessimistic about the share price if the company's revenue continues tracking the industry.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on China Modern Dairy Holdings.

What Are Revenue Growth Metrics Telling Us About The P/S?

The only time you'd be comfortable seeing a P/S like China Modern Dairy Holdings' is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered virtually the same number to the company's top line as the year before. Still, the latest three year period has seen an excellent 108% overall rise in revenue, in spite of its uninspiring short-term performance. So while the company has done a solid job in the past, it's somewhat concerning to see revenue growth decline as much as it has.

Turning to the outlook, the next year should generate growth of 3.3% as estimated by the six analysts watching the company. That's shaping up to be materially lower than the 5.5% growth forecast for the broader industry.

In light of this, it's curious that China Modern Dairy Holdings' P/S sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Bottom Line On China Modern Dairy Holdings' P/S

While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Given that China Modern Dairy 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. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for China Modern Dairy Holdings that you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.