Some Confidence Is Lacking In TL Natural Gas Holdings Limited (HKG:8536) As Shares Slide 26%

TL Natural Gas Holdings Limited (HKG:8536) shares have had a horrible month, losing 26% after a relatively good period beforehand. For any long-term shareholders, the last month ends a year to forget by locking in a 61% share price decline.

Although its price has dipped substantially, you could still be forgiven for feeling indifferent about TL Natural Gas Holdings' P/S ratio of 0.6x, since the median price-to-sales (or "P/S") ratio for the Specialty Retail industry in Hong Kong is about the same. 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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View our latest analysis for TL Natural Gas Holdings

How TL Natural Gas Holdings Has Been Performing

The revenue growth achieved at TL Natural Gas Holdings over the last year would be more than acceptable for most companies. One possibility is that the P/S is moderate because investors think this respectable revenue growth might not be enough to outperform the broader industry in the near future. Those who are bullish on TL Natural Gas Holdings will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

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 TL Natural Gas Holdings' earnings, revenue and cash flow.

How Is TL Natural Gas Holdings' Revenue Growth Trending?

In order to justify its P/S ratio, TL Natural Gas Holdings would need to produce growth that's similar to the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 24%. Pleasingly, revenue has also lifted 107% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Comparing that to the industry, which is predicted to deliver 82% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this information, we find it interesting that TL Natural Gas Holdings is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What We Can Learn From TL Natural Gas Holdings' P/S?

With its share price dropping off a cliff, the P/S for TL Natural Gas Holdings looks to be in line with the rest of the Specialty Retail industry. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that TL Natural Gas 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. If recent medium-term revenue trends continue, the probability of a share price decline will become quite substantial, placing shareholders at risk.

It is also worth noting that we have found 4 warning signs for TL Natural Gas Holdings (3 shouldn't be ignored!) that you need to take into consideration.

If these risks are making you reconsider your opinion on TL Natural Gas 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.