Optimistic Investors Push Sunmoon Food Company Limited (SGX:AAJ) Shares Up 72% But Growth Is Lacking

Despite an already strong run, Sunmoon Food Company Limited (SGX:AAJ) shares have been powering on, with a gain of 72% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 55% in the last year.

In spite of the firm bounce in price, it's still not a stretch to say that Sunmoon Food's price-to-sales (or "P/S") ratio of 0.8x right now seems quite "middle-of-the-road" compared to the Consumer Retailing industry in Singapore, where the median P/S ratio is around 0.4x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

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View our latest analysis for Sunmoon Food

What Does Sunmoon Food's P/S Mean For Shareholders?

Revenue has risen firmly for Sunmoon Food recently, which is pleasing to see. It might be that many expect the respectable revenue performance to wane, which has kept the P/S from rising. Those who are bullish on Sunmoon Food will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

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

Do Revenue Forecasts Match The P/S Ratio?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Sunmoon Food's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 25% gain to the company's top line. Still, revenue has fallen 13% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

Comparing that to the industry, which is predicted to deliver 11% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this information, we find it concerning that Sunmoon Food is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. 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.

The Bottom Line On Sunmoon Food's P/S

Its shares have lifted substantially and now Sunmoon Food's 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.

We find it unexpected that Sunmoon Food 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. 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.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Sunmoon Food (2 are potentially serious!) that you should be aware of before investing here.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.