What Esprit Holdings Limited's (HKG:330) 101% Share Price Gain Is Not Telling You

Esprit Holdings Limited (HKG:330) shareholders are no doubt pleased to see that the share price has bounced 101% in the last month, although it is still struggling to make up recently lost ground. But the last month did very little to improve the 65% share price decline over the last year.

In spite of the firm bounce in price, it's still not a stretch to say that Esprit Holdings' price-to-sales (or "P/S") ratio of 0.1x right now seems quite "middle-of-the-road" compared to the Specialty Retail industry in Hong Kong, where the median P/S ratio is around 0.4x. 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.

View our latest analysis for Esprit Holdings

What Does Esprit Holdings' Recent Performance Look Like?

For example, consider that Esprit Holdings' financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is moderate because investors think the company might still do enough to be in line with the broader industry in the near future. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

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 Esprit Holdings' earnings, revenue and cash flow.

Is There Some Revenue Growth Forecasted For Esprit Holdings?

Esprit Holdings' 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.

Retrospectively, the last year delivered a frustrating 16% decrease to the company's top line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 18% overall rise in revenue. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Comparing that to the industry, which is predicted to deliver 15% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this in mind, we find it intriguing that Esprit Holdings' P/S is comparable to that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

The Bottom Line On Esprit Holdings' P/S

Esprit Holdings' stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Esprit Holdings' average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Plus, you should also learn about these 2 warning signs we've spotted with Esprit Holdings (including 1 which is significant).

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

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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.