Comba Telecom Systems Holdings Limited's (HKG:2342) Popularity With Investors Under Threat As Stock Sinks 25%

The Comba Telecom Systems Holdings Limited (HKG:2342) share price has softened a substantial 25% over the previous 30 days, handing back much of the gains the stock has made lately. Of course, over the longer-term many would still wish they owned shares as the stock's price has soared 140% in the last twelve months.

Even after such a large drop in price, given close to half the companies operating in Hong Kong's Communications industry have price-to-sales ratios (or "P/S") below 0.7x, you may still consider Comba Telecom Systems Holdings as a stock to potentially avoid with its 1.8x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

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See our latest analysis for Comba Telecom Systems Holdings

How Has Comba Telecom Systems Holdings Performed Recently?

As an illustration, revenue has deteriorated at Comba Telecom Systems Holdings over the last year, which is not ideal at all. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Comba Telecom Systems Holdings will help you shine a light on its historical performance.

How Is Comba Telecom Systems Holdings' Revenue Growth Trending?

In order to justify its P/S ratio, Comba Telecom Systems Holdings would need to produce impressive growth in excess of the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 14%. As a result, revenue from three years ago have also fallen 32% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 43% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's alarming that Comba Telecom Systems Holdings' P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What Does Comba Telecom Systems Holdings' P/S Mean For Investors?

Comba Telecom Systems Holdings' P/S remain high even after its stock plunged. 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 Comba Telecom Systems Holdings currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

Having said that, be aware Comba Telecom Systems Holdings is showing 1 warning sign in our investment analysis, you should know about.

If you're unsure about the strength of Comba Telecom Systems 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.