Nine Dragons Paper (Holdings) Limited (HKG:2689) Surges 40% Yet Its Low P/S Is No Reason For Excitement

Nine Dragons Paper (Holdings) Limited (HKG:2689) shares have continued their recent momentum with a 40% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 94%.

Although its price has surged higher, when close to half the companies operating in Hong Kong's Forestry industry have price-to-sales ratios (or "P/S") above 1.4x, you may still consider Nine Dragons Paper (Holdings) as an enticing stock to check out with its 0.4x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

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See our latest analysis for Nine Dragons Paper (Holdings)

What Does Nine Dragons Paper (Holdings)'s P/S Mean For Shareholders?

Nine Dragons Paper (Holdings) certainly has been doing a good job lately as it's been growing revenue more than most other companies. It might be that many expect the strong revenue performance to degrade substantially, which has repressed the share price, and thus the P/S ratio. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Nine Dragons Paper (Holdings).

Is There Any Revenue Growth Forecasted For Nine Dragons Paper (Holdings)?

Nine Dragons Paper (Holdings)'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 worthy increase of 11%. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 4.3% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Turning to the outlook, the next year should generate growth of 7.3% as estimated by the ten analysts watching the company. With the industry predicted to deliver 14% growth, the company is positioned for a weaker revenue result.

With this in consideration, its clear as to why Nine Dragons Paper (Holdings)'s P/S is falling short industry peers. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Bottom Line On Nine Dragons Paper (Holdings)'s P/S

Despite Nine Dragons Paper (Holdings)'s share price climbing recently, its P/S still lags most other companies. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Nine Dragons Paper (Holdings)'s analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. The company will need a change of fortune to justify the P/S rising higher in the future.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Nine Dragons Paper (Holdings), and understanding should be part of your investment process.

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.