Futian Holdings Limited's (HKG:8196) Shares May Have Run Too Fast Too Soon
Futian Holdings Limited (HKG:8196) has a price-to-sales (P/S) ratio of 0.5x, slightly below the industry median of 0.6x. Despite a 27% revenue growth last year, the company's three-year revenue has declined by 51%. This raises concerns about the sustainability of its current P/S ratio, especially as the industry anticipates 5.3% growth. Investors seem optimistic despite the company's struggles, but continued poor revenue performance could jeopardize share prices. Caution is advised for potential investors due to underlying risk factors.
It's not a stretch to say that Futian Holdings Limited's (HKG:8196) price-to-sales (or "P/S") ratio of 0.5x right now seems quite "middle-of-the-road" for companies in the Trade Distributors industry in Hong Kong, where the median P/S ratio is around 0.6x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.
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See our latest analysis for Futian Holdings
How Has Futian Holdings Performed Recently?
The revenue growth achieved at Futian Holdings over the last year would be more than acceptable for most companies. It might be that many expect the respectable revenue performance to wane, which has kept the P/S from rising. If that doesn't eventuate, then existing shareholders probably aren't too pessimistic 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 Futian Holdings' earnings, revenue and cash flow.
What Are Revenue Growth Metrics Telling Us About The P/S?
The only time you'd be comfortable seeing a P/S like Futian Holdings' is when the company's growth is tracking the industry closely.
If we review the last year of revenue growth, the company posted a terrific increase of 27%. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 51% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.
Comparing that to the industry, which is predicted to deliver 5.3% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.
In light of this, it's somewhat alarming that Futian Holdings' P/S sits in line with the majority of other companies. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.
The Final Word
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.
The fact that Futian Holdings currently trades at a P/S on par with the rest of the industry is surprising to us since its recent revenues have been in decline over the medium-term, all while the industry is set to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
There are also other vital risk factors to consider before investing and we've discovered 3 warning signs for Futian Holdings 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).
