Risks Still Elevated At These Prices As Vobile Group Limited (HKG:3738) Shares Dive 26%

Vobile Group Limited (HKG:3738) shareholders won't be pleased to see that the share price has had a very rough month, dropping 26% and undoing the prior period's positive performance. Still, a bad month hasn't completely ruined the past year with the stock gaining 48%, which is great even in a bull market.

Even after such a large drop in price, when almost half of the companies in Hong Kong's Software industry have price-to-sales ratios (or "P/S") below 2.4x, you may still consider Vobile Group as a stock not worth researching with its 4.6x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

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Check out our latest analysis for Vobile Group

How Vobile Group Has Been Performing

There hasn't been much to differentiate Vobile Group's and the industry's revenue growth lately. One possibility is that the P/S ratio is high because investors think this modest revenue performance will accelerate. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Keen to find out how analysts think Vobile Group's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Vobile Group's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Vobile Group's is when the company's growth is on track to outshine the industry decidedly.

If we review the last year of revenue growth, the company posted a terrific increase of 23%. Pleasingly, revenue has also lifted 190% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 24% during the coming year according to the three analysts following the company. That's shaping up to be materially lower than the 36% growth forecast for the broader industry.

With this in consideration, we believe it doesn't make sense that Vobile Group's P/S is outpacing its industry peers. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

What We Can Learn From Vobile Group's P/S?

Vobile Group's shares may have suffered, but its P/S remains high. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Vobile Group, this doesn't appear to be impacting the P/S in the slightest. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Vobile Group with six simple checks.

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.