There's Reason For Concern Over Sunac China Holdings Limited's (HKG:1918) Massive 140% Price Jump

The Sunac China Holdings Limited (HKG:1918) share price has done very well over the last month, posting an excellent gain of 140%. Looking back a bit further, it's encouraging to see the stock is up 45% in the last year.

Even after such a large jump in price, it's still not a stretch to say that Sunac China Holdings' price-to-sales (or "P/S") ratio of 0.2x 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. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

See our latest analysis for Sunac China Holdings

How Sunac China Holdings Has Been Performing

Recent revenue growth for Sunac China Holdings has been in line with the industry. Perhaps the market is expecting future revenue performance to show no drastic signs of changing, justifying the P/S being at current levels. If you like the company, you'd be hoping this can at least be maintained so that you could pick up some stock while it's not quite in favour.

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

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

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

Taking a look back first, we see that the company grew revenue by an impressive 22% last year. However, this wasn't enough as the latest three year period has seen the company endure a nasty 48% drop in revenue in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Turning to the outlook, the next year should bring diminished returns, with revenue decreasing 13% as estimated by the dual analysts watching the company. With the industry predicted to deliver 5.3% growth, that's a disappointing outcome.

In light of this, it's somewhat alarming that Sunac China Holdings' P/S sits in line with the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as these declining revenues are likely to weigh on the share price eventually.

What We Can Learn From Sunac China Holdings' P/S?

Sunac China Holdings appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry 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.

Our check of Sunac China Holdings' analyst forecasts revealed that its outlook for shrinking revenue isn't bringing down its P/S as much as we would have predicted. When we see a gloomy outlook like this, our immediate thoughts are that the share price is at risk of declining, negatively impacting P/S. If the declining revenues were to materialize in the form of a declining share price, shareholders will be feeling the pinch.

Plus, you should also learn about these 3 warning signs we've spotted with Sunac China Holdings.

If you're unsure about the strength of Sunac China Holdings' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.