Wanda Hotel Development Company Limited's (HKG:169) 27% Price Boost Is Out Of Tune With Revenues

Despite an already strong run, Wanda Hotel Development Company Limited (HKG:169) shares have been powering on, with a gain of 27% in the last thirty days. The annual gain comes to 136% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, when almost half of the companies in Hong Kong's Real Estate industry have price-to-sales ratios (or "P/S") below 0.6x, you may consider Wanda Hotel Development as a stock probably not worth researching with its 2.3x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

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View our latest analysis for Wanda Hotel Development

How Has Wanda Hotel Development Performed Recently?

The revenue growth achieved at Wanda Hotel Development over the last year would be more than acceptable for most companies. It might be that many expect the respectable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. However, if this isn't the case, investors might get caught out paying too much for the stock.

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 Wanda Hotel Development's earnings, revenue and cash flow.

How Is Wanda Hotel Development's Revenue Growth Trending?

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

Retrospectively, the last year delivered a decent 9.4% gain to the company's revenues. The latest three year period has also seen a 23% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Weighing that recent medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 7.1% shows it's about the same on an annualised basis.

With this information, we find it interesting that Wanda Hotel Development is trading at a high P/S compared to the industry. It seems most investors are ignoring the fairly average recent growth rates and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as a continuation of recent revenue trends would weigh down the share price eventually.

The Key Takeaway

Wanda Hotel Development's P/S is on the rise since its shares have risen strongly. 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 didn't expect to see Wanda Hotel Development trade at such a high P/S considering its last three-year revenue growth has only been on par with the rest of the industry. Right now we are uncomfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you take the next step, you should know about the 1 warning sign for Wanda Hotel Development that we have uncovered.

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.