Unpleasant Surprises Could Be In Store For Shing Chi Holdings Limited's (HKG:1741) Shares

When you see that almost half of the companies in the Construction industry in Hong Kong have price-to-sales ratios (or "P/S") below 0.4x, Shing Chi Holdings Limited (HKG:1741) looks to be giving off some sell signals with its 0.9x 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 as high as it is.

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Check out our latest analysis for Shing Chi Holdings

How Has Shing Chi Holdings Performed Recently?

Revenue has risen at a steady rate over the last year for Shing Chi Holdings, which is generally not a bad outcome. It might be that many expect the reasonable 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.

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

How Is Shing Chi Holdings' Revenue Growth Trending?

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

Retrospectively, the last year delivered a decent 6.6% gain to the company's revenues. However, this wasn't enough as the latest three year period has seen an unpleasant 34% overall drop in revenue. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 20% 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 Shing Chi Holdings 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. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What Does Shing Chi Holdings' P/S Mean For Investors?

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that Shing Chi Holdings currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. 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. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Shing Chi Holdings (at least 1 which is significant), and understanding these should be part of your investment process.

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.