ELL Environmental Holdings Limited's (HKG:1395) 26% Price Boost Is Out Of Tune With Revenues

Those holding ELL Environmental Holdings Limited (HKG:1395) shares would be relieved that the share price has rebounded 26% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Notwithstanding the latest gain, the annual share price return of 9.2% isn't as impressive.

Following the firm bounce in price, when almost half of the companies in Hong Kong's Water Utilities industry have price-to-sales ratios (or "P/S") below 0.4x, you may consider ELL Environmental Holdings as a stock probably not worth researching with its 1.3x 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 as high as it is.

We've discovered 3 warning signs about ELL Environmental Holdings. View them for free.

See our latest analysis for ELL Environmental Holdings

How Has ELL Environmental Holdings Performed Recently?

The recent revenue growth at ELL Environmental Holdings would have to be considered satisfactory if not spectacular. 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.

Although there are no analyst estimates available for ELL Environmental Holdings, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is ELL Environmental Holdings' Revenue Growth Trending?

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

Taking a look back first, we see that the company managed to grow revenues by a handy 7.4% last year. Revenue has also lifted 18% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 5.8% growth in the next 12 months, the company's momentum is pretty similar based on recent medium-term annualised revenue results.

With this information, we find it interesting that ELL Environmental Holdings is trading at a high P/S compared to the industry. It seems most investors are ignoring the fairly average recent growth rates and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as a continuation of recent revenue trends would weigh down the share price eventually.

The Key Takeaway

The large bounce in ELL Environmental Holdings' shares has lifted the company's P/S handsomely. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We didn't expect to see ELL Environmental Holdings trade at such a high P/S considering its last three-year revenue growth has only been on par with the rest of the industry. When we see average revenue with industry-like growth combined with a high P/S, we suspect the share price is at risk of declining, bringing the P/S back in line with the industry too. 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 3 warning signs with ELL Environmental Holdings (at least 1 which is a bit concerning), and understanding them should be part of your investment process.

If you're unsure about the strength of ELL Environmental 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.