Unpleasant Surprises Could Be In Store For Shunten International (Holdings) Limited's (HKG:932) Shares

With a median price-to-sales (or "P/S") ratio of close to 0.9x in the Personal Products industry in Hong Kong, you could be forgiven for feeling indifferent about Shunten International (Holdings) Limited's (HKG:932) P/S ratio of 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.

See our latest analysis for Shunten International (Holdings)

How Has Shunten International (Holdings) Performed Recently?

With revenue growth that's exceedingly strong of late, Shunten International (Holdings) has been doing very well. It might be that many expect the strong revenue performance to wane, which has kept the share price, and thus the P/S ratio, from rising. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

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 Shunten International (Holdings)'s earnings, revenue and cash flow.

How Is Shunten International (Holdings)'s Revenue Growth Trending?

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

Taking a look back first, we see that the company grew revenue by an impressive 39% last year. However, this wasn't enough as the latest three year period has seen the company endure a nasty 29% drop in revenue in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 10% shows it's an unpleasant look.

With this in mind, we find it worrying that Shunten International (Holdings)'s P/S exceeds that of its industry peers. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

The Key Takeaway

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.

We find it unexpected that Shunten International (Holdings) trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Having said that, be aware Shunten International (Holdings) is showing 3 warning signs in our investment analysis, and 1 of those doesn't sit too well with us.

If these risks are making you reconsider your opinion on Shunten International (Holdings), 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.