Swire Pacific Limited's (HKG:19) Share Price Not Quite Adding Up

There wouldn't be many who think Swire Pacific Limited's (HKG:19) price-to-sales (or "P/S") ratio of 1x is worth a mention when the median P/S for the Real Estate industry in Hong Kong is similar at about 0.6x. 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.

See our latest analysis for Swire Pacific

What Does Swire Pacific's P/S Mean For Shareholders?

With revenue growth that's inferior to most other companies of late, Swire Pacific has been relatively sluggish. One possibility is that the P/S ratio is moderate because investors think this lacklustre revenue performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

Want the full picture on analyst estimates for the company? Then our free report on Swire Pacific will help you uncover what's on the horizon.

Do Revenue Forecasts Match The P/S Ratio?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Swire Pacific's to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 4.0% last year. Revenue has also lifted 21% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Shifting to the future, estimates from the seven analysts covering the company suggest revenue should grow by 1.0% each year over the next three years. That's shaping up to be materially lower than the 5.4% each year growth forecast for the broader industry.

In light of this, it's curious that Swire Pacific's 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 Key Takeaway

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.

When you consider that Swire Pacific's revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be 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.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Swire Pacific (1 is a bit concerning!) 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.