There's Reason For Concern Over XD Inc.'s (HKG:2400) Price

When close to half the companies in the Entertainment industry in Hong Kong have price-to-sales ratios (or "P/S") below 1.8x, you may consider XD Inc. (HKG:2400) as a stock to avoid entirely with its 5x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

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View our latest analysis for XD

How Has XD Performed Recently?

XD certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Keen to find out how analysts think XD's future stacks up against the industry? In that case, our free report is a great place to start.

How Is XD's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like XD's to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 52%. The strong recent performance means it was also able to grow revenue by 101% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 11% per year as estimated by the twelve analysts watching the company. With the industry predicted to deliver 9.2% growth per year, the company is positioned for a comparable revenue result.

With this in consideration, we find it intriguing that XD's P/S is higher than its industry peers. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.

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

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.

Analysts are forecasting XD's revenues to only grow on par with the rest of the industry, which has lead to the high P/S ratio being unexpected. When we see revenue growth that just matches the industry, we don't expect elevates P/S figures to remain inflated for the long-term. A positive change is needed in order to justify the current price-to-sales ratio.

You should always think about risks. Case in point, we've spotted 1 warning sign for XD you should be aware of.

If you're unsure about the strength of XD's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.