Take Care Before Jumping Onto Arrail Group Limited (HKG:6639) Even Though It's 25% Cheaper

The Arrail Group Limited (HKG:6639) share price has fared very poorly over the last month, falling by a substantial 25%. For any long-term shareholders, the last month ends a year to forget by locking in a 67% share price decline.

Even after such a large drop in price, there still wouldn't be many who think Arrail Group's price-to-sales (or "P/S") ratio of 0.5x is worth a mention when the median P/S in Hong Kong's Healthcare industry is similar at about 1x. 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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View our latest analysis for Arrail Group

How Has Arrail Group Performed Recently?

Arrail Group certainly has been doing a good job lately as its revenue growth has been positive while most other companies have been seeing their revenue go backwards. One possibility is that the P/S ratio is moderate because investors think the company's revenue will be less resilient moving forward. Those who are bullish on Arrail Group will be hoping that this isn't the case, so that they can pick up the stock at a slightly lower valuation.

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Is There Some Revenue Growth Forecasted For Arrail Group?

Arrail Group's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 10.0%. The latest three year period has also seen a 6.8% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Shifting to the future, estimates from the one analyst covering the company suggest revenue should grow by 16% per annum over the next three years. With the industry only predicted to deliver 6.0% per annum, the company is positioned for a stronger revenue result.

With this in consideration, we find it intriguing that Arrail Group's P/S is closely matching its industry peers. It may be that most investors aren't convinced the company can achieve future growth expectations.

The Key Takeaway

With its share price dropping off a cliff, the P/S for Arrail Group looks to be in line with the rest of the Healthcare industry. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Arrail Group currently trades on a lower than expected P/S since its forecasted revenue growth is higher than the wider industry. When we see a strong revenue outlook, with growth outpacing the industry, we can only assume potential uncertainty around these figures are what might be placing slight pressure on the P/S ratio. This uncertainty seems to be reflected in the share price which, while stable, could be higher given the revenue forecasts.

It is also worth noting that we have found 2 warning signs for Arrail Group that you need to take into consideration.

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.