Why Investors Shouldn't Be Surprised By New World Development Company Limited's (HKG:17) 28% Share Price Surge

New World Development Company Limited (HKG:17) shares have had a really impressive month, gaining 28% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 20% in the last twelve months.

In spite of the firm bounce in price, it's still not a stretch to say that New World Development's price-to-sales (or "P/S") ratio of 0.4x right now seems quite "middle-of-the-road" compared to the Real Estate industry in Hong Kong, where the median P/S ratio is around 0.7x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

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See our latest analysis for New World Development

How Has New World Development Performed Recently?

With revenue that's retreating more than the industry's average of late, New World Development has been very sluggish. It might be that many expect the dismal revenue performance to revert back to industry averages soon, which has kept the P/S from falling. If you still like the company, you'd want its revenue trajectory to turn around before making any decisions. If not, then existing shareholders may be a little nervous about the viability of the share price.

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

New World Development's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with 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 27%. This means it has also seen a slide in revenue over the longer-term as revenue is down 48% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 4.4% per year as estimated by the eleven analysts watching the company. That's shaping up to be similar to the 4.3% each year growth forecast for the broader industry.

With this information, we can see why New World Development is trading at a fairly similar P/S to the industry. Apparently shareholders are comfortable to simply hold on while the company is keeping a low profile.

What Does New World Development's P/S Mean For Investors?

New World Development appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in 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.

Our look at New World Development's revenue growth estimates show that its P/S is about what we expect, as both metrics follow closely with the industry averages. Right now shareholders are comfortable with the P/S as they are quite confident future revenue won't throw up any surprises. All things considered, if the P/S and revenue estimates contain no major shocks, then it's hard to see the share price moving strongly in either direction in the near future.

We don't want to rain on the parade too much, but we did also find 1 warning sign for New World Development that you need to be mindful of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.