Optimistic Investors Push Hong Ho Precision Textile Co.,Ltd. (TWSE:1446) Shares Up 29% But Growth Is Lacking

Hong Ho Precision Textile Co.,Ltd. (TWSE:1446) shareholders have had their patience rewarded with a 29% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 43% in the last year.

After such a large jump in price, when almost half of the companies in Taiwan's Luxury industry have price-to-sales ratios (or "P/S") below 1.4x, you may consider Hong Ho Precision TextileLtd as a stock not worth researching with its 10.5x 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 so lofty.

Check out our latest analysis for Hong Ho Precision TextileLtd

How Hong Ho Precision TextileLtd Has Been Performing

Recent times have been quite advantageous for Hong Ho Precision TextileLtd as its revenue has been rising very briskly. The P/S ratio is probably high because investors think this strong revenue growth will be enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

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

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Hong Ho Precision TextileLtd's to be considered reasonable.

Taking a look back first, we see that the company's revenues underwent some rampant growth over the last 12 months. Thanks to this gigantic uplift, it also grew revenue by 17% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth, although potentially wondering why there's so much variation in revenue growth.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 12% shows it's noticeably less attractive.

With this in mind, we find it worrying that Hong Ho Precision TextileLtd's P/S exceeds that of its industry peers. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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 recent growth rates.

The Final Word

Shares in Hong Ho Precision TextileLtd have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

The fact that Hong Ho Precision TextileLtd currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Hong Ho Precision TextileLtd that you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.