Subdued Growth No Barrier To Tongda Group Holdings Limited (HKG:698) With Shares Advancing 48%

Tongda Group Holdings Limited (HKG:698) shares have continued their recent momentum with a 48% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 26%.

In spite of the firm bounce in price, there still wouldn't be many who think Tongda Group Holdings' price-to-sales (or "P/S") ratio of 0.2x 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.

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See our latest analysis for Tongda Group Holdings

How Has Tongda Group Holdings Performed Recently?

While the industry has experienced revenue growth lately, Tongda Group Holdings' revenue has gone into reverse gear, which is not great. One possibility is that the P/S ratio is moderate because investors think this poor revenue performance will turn around. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Tongda Group Holdings' P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 14%. This means it has also seen a slide in revenue over the longer-term as revenue is down 41% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Shifting to the future, estimates from the only analyst covering the company suggest revenue should grow by 6.8% per year over the next three years. With the industry predicted to deliver 17% growth each year, the company is positioned for a weaker revenue result.

With this information, we find it interesting that Tongda Group Holdings is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Key Takeaway

Its shares have lifted substantially and now Tongda Group Holdings' P/S is back within range of the industry median. 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 look at the analysts forecasts of Tongda Group Holdings' revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Tongda Group Holdings with six simple checks will allow you to discover any risks that could be an issue.

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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.