Subdued Growth No Barrier To Nanfang Communication Holdings Limited (HKG:1617) With Shares Advancing 45%

Nanfang Communication Holdings Limited (HKG:1617) shareholders would be excited to see that the share price has had a great month, posting a 45% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 36%.

Even after such a large jump in price, it's still not a stretch to say that Nanfang Communication Holdings' price-to-sales (or "P/S") ratio of 0.3x right now seems quite "middle-of-the-road" compared to the Communications industry in Hong Kong, where the median P/S ratio is around 0.5x. 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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Check out our latest analysis for Nanfang Communication Holdings

What Does Nanfang Communication Holdings' P/S Mean For Shareholders?

The recent revenue growth at Nanfang Communication Holdings would have to be considered satisfactory if not spectacular. It might be that many expect the respectable revenue performance to only match most other companies over the coming period, which has kept the P/S from rising. If you like the company, you'd be hoping this isn't 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 Nanfang Communication Holdings' earnings, revenue and cash flow.

Is There Some Revenue Growth Forecasted For Nanfang Communication Holdings?

The only time you'd be comfortable seeing a P/S like Nanfang Communication Holdings' is when the company's growth is tracking the industry closely.

Taking a look back first, we see that the company managed to grow revenues by a handy 3.0% last year. Revenue has also lifted 23% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 31% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it interesting that Nanfang Communication Holdings is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. 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 Nanfang Communication Holdings' P/S?

Its shares have lifted substantially and now Nanfang Communication Holdings' P/S is back within range of the industry median. 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.

We've established that Nanfang Communication Holdings' average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. Right now we are uncomfortable with the P/S as this revenue performance isn't likely to support a more positive sentiment for long. Unless the recent medium-term conditions improve, it's hard to accept the current share price as fair value.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Nanfang Communication Holdings, and understanding should be part of your investment process.

If you're unsure about the strength of Nanfang Communication Holdings' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.