Pinning Down China Mengniu Dairy Company Limited's (HKG:2319) P/S Is Difficult Right Now

Explore China Mengniu Dairy's Fair Values from the Community and select yours

It's not a stretch to say that China Mengniu Dairy Company Limited's (HKG:2319) price-to-sales (or "P/S") ratio of 0.7x 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.

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Check out our latest analysis for China Mengniu Dairy

How China Mengniu Dairy Has Been Performing

While the industry has experienced revenue growth lately, China Mengniu Dairy's revenue has gone into reverse gear, which is not great. It might be that many expect the dour revenue performance to strengthen positively, which has kept the P/S from falling. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Is There Some Revenue Growth Forecasted For China Mengniu Dairy?

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

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 10%. Unfortunately, that's brought it right back to where it started three years ago with revenue growth being virtually non-existent overall during that time. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

Looking ahead now, revenue is anticipated to climb by 2.8% per annum during the coming three years according to the analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 5.5% per annum, which is noticeably more attractive.

With this information, we find it interesting that China Mengniu Dairy is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Final Word

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Given that China Mengniu Dairy's 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. A positive change is needed in order to justify the current price-to-sales ratio.

We don't want to rain on the parade too much, but we did also find 3 warning signs for China Mengniu Dairy that you need to be mindful of.

If these risks are making you reconsider your opinion on China Mengniu Dairy, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.