Homeland Interactive Technology Ltd.'s (HKG:3798) Share Price Boosted 34% But Its Business Prospects Need A Lift Too

The Homeland Interactive Technology Ltd. (HKG:3798) share price has done very well over the last month, posting an excellent gain of 34%. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 17% over that time.

Even after such a large jump in price, Homeland Interactive Technology's price-to-sales (or "P/S") ratio of 1.2x might still make it look like a buy right now compared to the Entertainment industry in Hong Kong, where around half of the companies have P/S ratios above 1.7x and even P/S above 4x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

Check out our latest analysis for Homeland Interactive Technology

What Does Homeland Interactive Technology's P/S Mean For Shareholders?

For example, consider that Homeland Interactive Technology's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is low because investors think the company won't do enough to avoid underperforming the broader industry in the near future. Those who are bullish on Homeland Interactive Technology will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Homeland Interactive Technology's earnings, revenue and cash flow.

What Are Revenue Growth Metrics Telling Us About The Low P/S?

The only time you'd be truly comfortable seeing a P/S as low as Homeland Interactive Technology's is when the company's growth is on track to lag 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 4.2%. Even so, admirably revenue has lifted 93% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

This is in contrast to the rest of the industry, which is expected to grow by 35% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Homeland Interactive Technology is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

The Final Word

Homeland Interactive Technology's stock price has surged recently, but its but its P/S still remains modest. 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.

In line with expectations, Homeland Interactive Technology maintains its low P/S on the weakness of its recent three-year growth being lower than the wider industry forecast. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

Having said that, be aware Homeland Interactive Technology is showing 3 warning signs in our investment analysis, you should know about.

If you're unsure about the strength of Homeland Interactive Technology'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.