Unpleasant Surprises Could Be In Store For Ming Yuan Cloud Group Holdings Limited's (HKG:909) Shares

Ming Yuan Cloud Group Holdings Limited's (HKG:909) price-to-sales (or "P/S") ratio of 2.6x may not look like an appealing investment opportunity when you consider close to half the companies in the Software industry in Hong Kong have P/S ratios below 1.3x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

Check out our latest analysis for Ming Yuan Cloud Group Holdings

How Has Ming Yuan Cloud Group Holdings Performed Recently?

While the industry has experienced revenue growth lately, Ming Yuan Cloud Group Holdings' revenue has gone into reverse gear, which is not great. It might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Ming Yuan Cloud Group Holdings.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Ming Yuan Cloud Group Holdings would need to produce impressive growth in excess of the industry.

Retrospectively, the last year delivered a frustrating 19% decrease to the company's top line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 17% overall rise in revenue. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

Looking ahead now, revenue is anticipated to climb by 14% per year during the coming three years according to the analysts following the company. That's shaping up to be materially lower than the 20% each year growth forecast for the broader industry.

In light of this, it's alarming that Ming Yuan Cloud Group Holdings' P/S sits above the majority of other companies. 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.

The Final Word

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.

It comes as a surprise to see Ming Yuan Cloud Group Holdings trade at such a high P/S given the revenue forecasts look less than stellar. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. At these price levels, investors should remain cautious, particularly if things don't improve.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Ming Yuan Cloud Group Holdings with six simple checks on some of these key factors.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.