Even With A 41% Surge, Cautious Investors Are Not Rewarding New Century Healthcare Holding Co. Limited's (HKG:1518) Performance Completely

The New Century Healthcare Holding Co. Limited (HKG:1518) share price has done very well over the last month, posting an excellent gain of 41%. The annual gain comes to 176% following the latest surge, making investors sit up and take notice.

In spite of the firm bounce in price, when close to half the companies operating in Hong Kong's Healthcare industry have price-to-sales ratios (or "P/S") above 1.2x, you may still consider New Century Healthcare Holding as an enticing stock to check out with its 0.6x P/S ratio. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for New Century Healthcare Holding

How Has New Century Healthcare Holding Performed Recently?

Recent times have been quite advantageous for New Century Healthcare Holding as its revenue has been rising very briskly. Perhaps the market is expecting future revenue performance to dwindle, which has kept the P/S suppressed. Those who are bullish on New Century Healthcare Holding will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on New Century Healthcare Holding's earnings, revenue and cash flow.

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

New Century Healthcare Holding's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 47%. Pleasingly, revenue has also lifted 82% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Comparing that to the industry, which is only predicted to deliver 17% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised revenue results.

With this information, we find it odd that New Century Healthcare Holding is trading at a P/S lower than the industry. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Bottom Line On New Century Healthcare Holding's P/S

The latest share price surge wasn't enough to lift New Century Healthcare Holding's P/S close to the industry median. 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.

Our examination of New Century Healthcare Holding revealed its three-year revenue trends aren't boosting its P/S anywhere near as much as we would have predicted, given they look better than current industry expectations. When we see robust revenue growth that outpaces the industry, we presume that there are notable underlying risks to the company's future performance, which is exerting downward pressure on the P/S ratio. At least price risks look to be very low if recent medium-term revenue trends continue, but investors seem to think future revenue could see a lot of volatility.

Having said that, be aware New Century Healthcare Holding is showing 2 warning signs in our investment analysis, 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.