MMG Limited's (HKG:1208) P/S Is Still On The Mark Following 29% Share Price Bounce

Explore MMG's Fair Values from the Community and select yours

Despite an already strong run, MMG Limited (HKG:1208) shares have been powering on, with a gain of 29% in the last thirty days. The last month tops off a massive increase of 112% in the last year.

Following the firm bounce in price, you could be forgiven for thinking MMG is a stock not worth researching with a price-to-sales ratios (or "P/S") of 1.6x, considering almost half the companies in Hong Kong's Metals and Mining industry have P/S ratios below 0.7x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

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View our latest analysis for MMG

How Has MMG Performed Recently?

MMG could be doing better as it's been growing revenue less than most other companies lately. One possibility is that the P/S ratio is high because investors think this lacklustre revenue performance will improve markedly. If not, then existing shareholders may be very nervous about the viability of the share price.

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Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, MMG would need to produce impressive growth in excess of the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 3.1% last year. The latest three year period has also seen a 5.3% overall rise in revenue, aided somewhat by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 13% per year during the coming three years according to the twelve analysts following the company. That's shaping up to be materially higher than the 11% per annum growth forecast for the broader industry.

With this information, we can see why MMG is trading at such a high P/S compared to the industry. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What Does MMG's P/S Mean For Investors?

The large bounce in MMG's shares has lifted the company's P/S handsomely. 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.

Our look into MMG shows that its P/S ratio remains high on the merit of its strong future revenues. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for MMG that you should be aware of.

If these risks are making you reconsider your opinion on MMG, 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.