There's Reason For Concern Over Wonderful Sky Financial Group Holdings Limited's (HKG:1260) Massive 27% Price Jump

Wonderful Sky Financial Group Holdings Limited (HKG:1260) shares have continued their recent momentum with a 27% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 44%.

After such a large jump in price, given close to half the companies operating in Hong Kong's Media industry have price-to-sales ratios (or "P/S") below 0.8x, you may consider Wonderful Sky Financial Group Holdings as a stock to potentially avoid with its 1.6x 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 as high as it is.

See our latest analysis for Wonderful Sky Financial Group Holdings

What Does Wonderful Sky Financial Group Holdings' P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Wonderful Sky Financial Group Holdings over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Wonderful Sky Financial Group Holdings will help you shine a light on its historical performance.

How Is Wonderful Sky Financial Group Holdings' Revenue Growth Trending?

In order to justify its P/S ratio, Wonderful Sky Financial Group Holdings would need to produce impressive growth in excess of the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 24%. As a result, revenue from three years ago have also fallen 51% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 12% shows it's an unpleasant look.

In light of this, it's alarming that Wonderful Sky Financial Group Holdings' P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What Does Wonderful Sky Financial Group Holdings' P/S Mean For Investors?

Wonderful Sky Financial Group Holdings' P/S is on the rise since its shares have risen strongly. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that Wonderful Sky Financial Group Holdings currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

Before you settle on your opinion, we've discovered 2 warning signs for Wonderful Sky Financial Group Holdings (1 doesn't sit too well with us!) that you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.