Little Excitement Around First Shanghai Investments Limited's (HKG:227) Revenues As Shares Take 27% Pounding

The First Shanghai Investments Limited (HKG:227) share price has softened a substantial 27% over the previous 30 days, handing back much of the gains the stock has made lately. Looking at the bigger picture, even after this poor month the stock is up 83% in the last year.

After such a large drop in price, First Shanghai Investments' price-to-sales (or "P/S") ratio of 1.4x might make it look like a buy right now compared to the Capital Markets industry in Hong Kong, where around half of the companies have P/S ratios above 2.8x and even P/S above 8x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

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Check out our latest analysis for First Shanghai Investments

How Has First Shanghai Investments Performed Recently?

First Shanghai Investments certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. One possibility is that the P/S ratio is low because investors think this strong revenue growth might actually underperform the broader industry in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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 First Shanghai Investments' earnings, revenue and cash flow.

Is There Any Revenue Growth Forecasted For First Shanghai Investments?

First Shanghai Investments' P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

Taking a look back first, we see that the company grew revenue by an impressive 31% last year. However, this wasn't enough as the latest three year period has seen the company endure a nasty 28% drop in revenue in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 34% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we understand why First Shanghai Investments' P/S is lower than most of its industry peers. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

The Key Takeaway

First Shanghai Investments' P/S has taken a dip along with its share price. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

As we suspected, our examination of First Shanghai Investments revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

It is also worth noting that we have found 3 warning signs for First Shanghai Investments that you need to take into consideration.

If you're unsure about the strength of First Shanghai Investments' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.