There's Reason For Concern Over China Starch Holdings Limited's (HKG:3838) Massive 37% Price Jump

China Starch Holdings Limited (HKG:3838) shareholders have had their patience rewarded with a 37% share price jump in the last month. The last month tops off a massive increase of 107% in the last year.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about China Starch Holdings' P/S ratio of 0.1x, since the median price-to-sales (or "P/S") ratio for the Food industry in Hong Kong is also close to 0.5x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

Check out our latest analysis for China Starch Holdings

How Has China Starch Holdings Performed Recently?

As an illustration, revenue has deteriorated at China Starch Holdings over the last year, which is not ideal at all. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

Although there are no analyst estimates available for China Starch 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 China Starch Holdings' Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like China Starch Holdings' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 2.7% decrease to the company's top line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 8.3% overall rise in revenue. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 5.5% shows it's noticeably less attractive.

With this in mind, we find it intriguing that China Starch Holdings' P/S is comparable to that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

What We Can Learn From China Starch Holdings' P/S?

China Starch Holdings appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that China Starch Holdings' average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. If recent medium-term revenue trends continue, the probability of a share price decline will become quite substantial, placing shareholders at risk.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for China Starch Holdings with six simple checks.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.