There's Reason For Concern Over Tongdao Liepin Group's (HKG:6100) Massive 57% Price Jump

Tongdao Liepin Group (HKG:6100) shares have had a really impressive month, gaining 57% after a shaky period beforehand. But the last month did very little to improve the 64% share price decline over the last year.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Tongdao Liepin Group's P/S ratio of 0.6x, since the median price-to-sales (or "P/S") ratio for the Interactive Media and Services industry in Hong Kong is also close to 0.5x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Check out our latest analysis for Tongdao Liepin Group

What Does Tongdao Liepin Group's P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, Tongdao Liepin Group's revenue has gone into reverse gear, which is not great. Perhaps the market is expecting its poor revenue performance to improve, keeping the P/S from dropping. However, if this isn't the case, investors might get caught out paying too much for the stock.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Tongdao Liepin Group.

Is There Some Revenue Growth Forecasted For Tongdao Liepin Group?

The only time you'd be comfortable seeing a P/S like Tongdao Liepin Group's is when the company's growth is tracking the industry closely.

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 6.6%. As a result, revenue from three years ago have also fallen 2.5% overall. 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 2.2% as estimated by the five analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 9.6%, which is noticeably more attractive.

With this information, we find it interesting that Tongdao Liepin Group is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Key Takeaway

Tongdao Liepin Group appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry 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.

Given that Tongdao Liepin Group's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. A positive change is needed in order to justify the current price-to-sales ratio.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Tongdao Liepin Group (1 is significant!) that you should be aware of before investing here.

If these risks are making you reconsider your opinion on Tongdao Liepin Group, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.