Revenues Not Telling The Story For Fire Rock Holdings Limited (HKG:1909) After Shares Rise 67%

Fire Rock Holdings Limited (HKG:1909) shareholders have had their patience rewarded with a 67% share price jump in the last month. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 2.8% over the last year.

Since its price has surged higher, you could be forgiven for thinking Fire Rock Holdings is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 6.1x, considering almost half the companies in Hong Kong's Entertainment industry have P/S ratios below 1.7x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Fire Rock Holdings

What Does Fire Rock Holdings' Recent Performance Look Like?

The recent revenue growth at Fire Rock Holdings would have to be considered satisfactory if not spectacular. Perhaps the market believes the recent revenue performance is strong enough to outperform the industry, which has inflated the P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Is There Enough Revenue Growth Forecasted For Fire Rock Holdings?

The only time you'd be truly comfortable seeing a P/S as steep as Fire Rock Holdings' is when the company's growth is on track to outshine the industry decidedly.

Taking a look back first, we see that the company managed to grow revenues by a handy 4.9% last year. Still, lamentably revenue has fallen 83% in aggregate from three years ago, which is disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 35% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that Fire Rock Holdings is trading at a P/S higher than the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What Does Fire Rock Holdings' P/S Mean For Investors?

The strong share price surge has lead to Fire Rock Holdings' P/S soaring as well. 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.

Our examination of Fire Rock Holdings revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

You need to take note of risks, for example - Fire Rock Holdings has 2 warning signs (and 1 which is significant) we think you should know about.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.