Midland Holdings Limited's (HKG:1200) Shares Climb 31% But Its Business Is Yet to Catch Up

Despite an already strong run, Midland Holdings Limited (HKG:1200) shares have been powering on, with a gain of 31% in the last thirty days. The last month tops off a massive increase of 164% in the last year.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about Midland Holdings' P/S ratio of 0.2x, since the median price-to-sales (or "P/S") ratio for the Real Estate industry in Hong Kong is also close to 0.7x. 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.

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See our latest analysis for Midland Holdings

What Does Midland Holdings' P/S Mean For Shareholders?

With its revenue growth in positive territory compared to the declining revenue of most other companies, Midland Holdings has been doing quite well of late. One possibility is that the P/S ratio is moderate because investors think the company's revenue will be less resilient moving forward. Those who are bullish on Midland Holdings will be hoping that this isn't the case, so that they can pick up the stock at a slightly lower valuation.

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

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

In order to justify its P/S ratio, Midland Holdings would need to produce growth that's similar to the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 49%. Although, its longer-term performance hasn't been as strong with three-year revenue growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Turning to the outlook, the next year should generate growth of 1.5% as estimated by the one analyst watching the company. Meanwhile, the rest of the industry is forecast to expand by 6.3%, which is noticeably more attractive.

In light of this, it's curious that Midland Holdings' P/S sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Final Word

Midland Holdings' stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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.

Given that Midland Holdings' 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. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Plus, you should also learn about this 1 warning sign we've spotted with Midland Holdings.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.