Tongda Hong Tai Holdings Limited's (HKG:2363) 44% Dip Still Leaving Some Shareholders Feeling Restless Over Its P/SRatio

Tongda Hong Tai Holdings Limited (HKG:2363) shareholders that were waiting for something to happen have been dealt a blow with a 44% share price drop in the last month. For any long-term shareholders, the last month ends a year to forget by locking in a 56% share price decline.

In spite of the heavy fall in price, there still wouldn't be many who think Tongda Hong Tai Holdings' price-to-sales (or "P/S") ratio of 0.7x is worth a mention when the median P/S in Hong Kong's Electronic industry is similar at about 0.4x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

View our latest analysis for Tongda Hong Tai Holdings

How Tongda Hong Tai Holdings Has Been Performing

For example, consider that Tongda Hong Tai Holdings' financial performance has been poor lately as its revenue has been in decline. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. If not, then existing shareholders may be a little nervous about the viability of the share price.

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 Tongda Hong Tai Holdings' earnings, revenue and cash flow.

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

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

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 39%. The last three years don't look nice either as the company has shrunk revenue by 81% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 19% shows it's an unpleasant look.

In light of this, it's somewhat alarming that Tongda Hong Tai Holdings' P/S sits in line with the majority of other companies. 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 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 We Can Learn From Tongda Hong Tai Holdings' P/S?

With its share price dropping off a cliff, the P/S for Tongda Hong Tai Holdings looks to be in line with the rest of the Electronic industry. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We find it unexpected that Tongda Hong Tai Holdings trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 5 warning signs with Tongda Hong Tai Holdings, and understanding them should be part of your investment process.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.