Even With A 26% Surge, Cautious Investors Are Not Rewarding Redco Healthy Living Company Limited's (HKG:2370) Performance Completely

Redco Healthy Living Company Limited (HKG:2370) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

Although its price has surged higher, you could still be forgiven for feeling indifferent about Redco Healthy Living's P/S ratio of 0.1x, since the median price-to-sales (or "P/S") ratio for the Real Estate industry in Hong Kong is also close to 0.6x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for Redco Healthy Living

What Does Redco Healthy Living's P/S Mean For Shareholders?

For instance, Redco Healthy Living's receding revenue in recent times would have to be some food for thought. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Redco Healthy Living will help you shine a light on its historical performance.

Is There Some Revenue Growth Forecasted For Redco Healthy Living?

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

Retrospectively, the last year delivered a frustrating 7.4% decrease to the company's top line. Even so, admirably revenue has lifted 33% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

This is in contrast to the rest of the industry, which is expected to grow by 5.2% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's curious that Redco Healthy Living's P/S sits in line with the majority of other companies. Apparently some shareholders believe the recent performance is at its limits and have been accepting lower selling prices.

What Does Redco Healthy Living's P/S Mean For Investors?

Redco Healthy Living's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of 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.

To our surprise, Redco Healthy Living revealed its three-year revenue trends aren't contributing to its P/S as much as we would have predicted, given they look better than current industry expectations. There could be some unobserved threats to revenue preventing the P/S ratio from matching this positive performance. At least the risk of a price drop looks to be subdued if recent medium-term revenue trends continue, but investors seem to think future revenue could see some volatility.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Redco Healthy Living (2 are significant!) that you should be aware of before investing here.

If these risks are making you reconsider your opinion on Redco Healthy Living, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.