China International Holdings Limited's (SGX:BEH) Shares Bounce 43% But Its Business Still Trails The Industry

China International Holdings Limited (SGX:BEH) shareholders would be excited to see that the share price has had a great month, posting a 43% gain and recovering from prior weakness. But the last month did very little to improve the 50% share price decline over the last year.

In spite of the firm bounce in price, China International Holdings may still be sending buy signals at present with its price-to-sales (or "P/S") ratio of 0.1x, considering almost half of all companies in the Water Utilities industry in Singapore have P/S ratios greater than 1.7x and even P/S higher than 4x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

We've discovered 2 warning signs about China International Holdings. View them for free.

See our latest analysis for China International Holdings

What Does China International Holdings' P/S Mean For Shareholders?

For example, consider that China International Holdings' financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is low because investors think the company won't do enough to avoid underperforming the broader industry in the near future. Those who are bullish on China International Holdings will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on China International Holdings' earnings, revenue and cash flow.

How Is China International Holdings' Revenue Growth Trending?

In order to justify its P/S ratio, China International Holdings would need to produce sluggish growth that's trailing 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 5.1%. This means it has also seen a slide in revenue over the longer-term as revenue is down 28% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 6.3% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we understand why China International Holdings' P/S is lower than most of its industry peers. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

What Does China International Holdings' P/S Mean For Investors?

Despite China International Holdings' share price climbing recently, its P/S still lags most other companies. 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.

As we suspected, our examination of China International Holdings revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with China International Holdings, and understanding these should be part of your investment process.

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.