CLP Holdings Limited (HKG:2) Screens Well But There Might Be A Catch

With a price-to-sales (or "P/S") ratio of 1.9x CLP Holdings Limited (HKG:2) may be sending bullish signals at the moment, given that almost half of all the Electric Utilities companies in Hong Kong have P/S ratios greater than 2.9x and even P/S higher than 15x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

View our latest analysis for CLP Holdings

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

With revenue that's retreating more than the industry's average of late, CLP Holdings has been very sluggish. It seems that many are expecting the dismal revenue performance to persist, which has repressed the P/S. If you still like the company, you'd want its revenue trajectory to turn around before making any decisions. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Want the full picture on analyst estimates for the company? Then our free report on CLP Holdings will help you uncover what's on the horizon.

How Is CLP Holdings' Revenue Growth Trending?

There's an inherent assumption that a company should underperform the industry for P/S ratios like CLP Holdings' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 13% decrease to the company's top line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 9.5% overall rise in revenue. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 2.1% per annum during the coming three years according to the eight analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 4.0% per annum, which is not materially different.

In light of this, it's peculiar that CLP Holdings' P/S sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.

What Does CLP Holdings' P/S Mean For Investors?

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

It looks to us like the P/S figures for CLP Holdings remain low despite growth that is expected to be in line with other companies in the industry. When we see middle-of-the-road revenue growth like this, we assume it must be the potential risks that are what is placing pressure on the P/S ratio. Perhaps investors are concerned that the company could underperform against the forecasts over the near term.

And what about other risks? Every company has them, and we've spotted 3 warning signs for CLP Holdings you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.