What HBM Holdings Limited's (HKG:2142) 51% Share Price Gain Is Not Telling You

Despite an already strong run, HBM Holdings Limited (HKG:2142) shares have been powering on, with a gain of 51% in the last thirty days. The last 30 days were the cherry on top of the stock's 472% gain in the last year, which is nothing short of spectacular.

Since its price has surged higher, HBM Holdings may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 23.1x, when you consider almost half of the companies in the Biotechs industry in Hong Kong have P/S ratios under 10.7x and even P/S lower than 4x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

Our free stock report includes 3 warning signs investors should be aware of before investing in HBM Holdings. Read for free now.

View our latest analysis for HBM Holdings

How HBM Holdings Has Been Performing

While the industry has experienced revenue growth lately, HBM Holdings' revenue has gone into reverse gear, which is not great. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

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

Do Revenue Forecasts Match The High P/S Ratio?

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

Retrospectively, the last year delivered a frustrating 57% decrease to the company's top line. Spectacularly, three year revenue growth has ballooned by several orders of magnitude, despite the drawbacks experienced in the last 12 months. So while the company has done a great job in the past, it's somewhat concerning to see revenue growth decline so harshly.

Looking ahead now, revenue is anticipated to climb by 27% per annum during the coming three years according to the lone analyst following the company. Meanwhile, the rest of the industry is forecast to expand by 51% each year, which is noticeably more attractive.

With this information, we find it concerning that HBM Holdings is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What Does HBM Holdings' P/S Mean For Investors?

The strong share price surge has lead to HBM 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.

We've concluded that HBM Holdings currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

We don't want to rain on the parade too much, but we did also find 3 warning signs for HBM Holdings (1 is potentially serious!) that you need to be mindful of.

If these risks are making you reconsider your opinion on HBM Holdings, 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.