GBA Holdings Limited (HKG:261) May Have Run Too Fast Too Soon With Recent 34% Price Plummet

GBA Holdings Limited (HKG:261) shareholders won't be pleased to see that the share price has had a very rough month, dropping 34% and undoing the prior period's positive performance. Looking at the bigger picture, even after this poor month the stock is up 55% in the last year.

Although its price has dipped substantially, when almost half of the companies in Hong Kong's Communications industry have price-to-sales ratios (or "P/S") below 0.5x, you may still consider GBA Holdings as a stock not worth researching with its 2.5x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

View our latest analysis for GBA Holdings

What Does GBA Holdings' P/S Mean For Shareholders?

Recent times have been quite advantageous for GBA Holdings as its revenue has been rising very briskly. The P/S ratio is probably high because investors think this strong revenue growth will be 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 GBA Holdings will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For GBA Holdings?

GBA Holdings' P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Taking a look back first, we see that the company grew revenue by an impressive 41% last year. However, this wasn't enough as the latest three year period has seen the company endure a nasty 80% drop in revenue in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 38% 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 GBA Holdings 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. 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 We Can Learn From GBA Holdings' P/S?

GBA Holdings' shares may have suffered, but its P/S remains high. 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.

Our examination of GBA Holdings 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. 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. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

Before you take the next step, you should know about the 5 warning signs for GBA Holdings (3 are a bit unpleasant!) that we have uncovered.

If you're unsure about the strength of GBA 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.