Why We're Not Concerned About China Modern Dairy Holdings Ltd.'s (HKG:1117) Share Price

There wouldn't be many who think China Modern Dairy Holdings Ltd.'s (HKG:1117) price-to-sales (or "P/S") ratio of 0.6x is worth a mention when the median P/S for the Food industry in Hong Kong is similar at about 0.5x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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See our latest analysis for China Modern Dairy Holdings

How Has China Modern Dairy Holdings Performed Recently?

China Modern Dairy Holdings hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. It might be that many expect the dour revenue performance to strengthen positively, which has kept the P/S from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

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 a frustrating 1.5% decrease to the company's top line. Even so, admirably revenue has lifted 87% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Looking ahead now, revenue is anticipated to climb by 5.7% per year during the coming three years according to the nine analysts following the company. With the industry predicted to deliver 5.7% growth per annum, the company is positioned for a comparable revenue result.

With this in mind, it makes sense that China Modern Dairy Holdings' P/S is closely matching its industry peers. It seems most investors are expecting to see average future growth and are only willing to pay a moderate amount for the stock.

What We Can Learn From 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.

Our look at China Modern Dairy Holdings' revenue growth estimates show that its P/S is about what we expect, as both metrics follow closely with the industry averages. Right now shareholders are comfortable with the P/S as they are quite confident future revenue won't throw up any surprises. All things considered, if the P/S and revenue estimates contain no major shocks, then it's hard to see the share price moving strongly in either direction in the near future.

Before you settle on your opinion, we've discovered 1 warning sign for China Modern Dairy Holdings that you should be aware of.

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.