Optimistic Investors Push SIM Technology Group Limited (HKG:2000) Shares Up 25% But Growth Is Lacking

The SIM Technology Group Limited (HKG:2000) share price has done very well over the last month, posting an excellent gain of 25%. Unfortunately, despite the strong performance over the last month, the full year gain of 2.8% isn't as attractive.

After such a large jump in price, you could be forgiven for thinking SIM Technology Group is a stock not worth researching with a price-to-sales ratios (or "P/S") of 1.7x, considering almost half the companies in Hong Kong's Communications industry have P/S ratios below 0.7x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

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See our latest analysis for SIM Technology Group

What Does SIM Technology Group's Recent Performance Look Like?

Revenue has risen at a steady rate over the last year for SIM Technology Group, which is generally not a bad outcome. One possibility is that the P/S ratio is high because investors think this good revenue growth will be enough to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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 SIM Technology Group's earnings, revenue and cash flow.

What Are Revenue Growth Metrics Telling Us About The High P/S?

SIM Technology Group's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 5.6%. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 27% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 44% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that SIM Technology Group is trading at a P/S higher than the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What Does SIM Technology Group's P/S Mean For Investors?

SIM Technology Group's P/S is on the rise since its shares have risen strongly. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of SIM Technology Group revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for SIM Technology Group with six simple checks on some of these key factors.

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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.