Hin Sang Group (International) Holding Co. Ltd.'s (HKG:6893) 36% Share Price Surge Not Quite Adding Up

Hin Sang Group (International) Holding Co. Ltd. (HKG:6893) shares have continued their recent momentum with a 36% gain in the last month alone. Taking a wider view, although not as strong as the last month, the full year gain of 15% is also fairly reasonable.

After such a large jump in price, when almost half of the companies in Hong Kong's Personal Products industry have price-to-sales ratios (or "P/S") below 1.4x, you may consider Hin Sang Group (International) Holding as a stock not worth researching with its 3.4x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

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View our latest analysis for Hin Sang Group (International) Holding

What Does Hin Sang Group (International) Holding's P/S Mean For Shareholders?

The revenue growth achieved at Hin Sang Group (International) Holding over the last year would be more than acceptable for most companies. It might be that many expect the respectable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders may be a little nervous about the viability of the share price.

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

In order to justify its P/S ratio, Hin Sang Group (International) Holding would need to produce outstanding growth that's well in excess of the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 10% last year. Still, lamentably revenue has fallen 20% in aggregate from three years ago, which is disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 22% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that Hin Sang Group (International) Holding is trading at a P/S higher than the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very 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 Hin Sang Group (International) Holding's P/S

The strong share price surge has lead to Hin Sang Group (International) Holding's P/S soaring as well. 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.

Our examination of Hin Sang Group (International) Holding revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Hin Sang Group (International) Holding (1 can't be ignored) you should be aware of.

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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.