Risks To Shareholder Returns Are Elevated At These Prices For Cool Link (Holdings) Limited (HKG:8491)
Cool Link (Holdings) Limited (HKG:8491) has a price-to-sales (P/S) ratio of 1.1x, higher than the industry median of 0.6x, raising concerns about shareholder returns. The company's revenue has declined by 3.6% last year and 17% over three years, contrasting with the industry's expected 15% growth. This discrepancy suggests potential share price declines unless revenue conditions improve. Investors may be overly optimistic, as the P/S ratio does not reflect the company's poor financial performance. Warning signs have been identified, indicating caution for potential investors.
It's not a stretch to say that Cool Link (Holdings) Limited's (HKG:8491) price-to-sales (or "P/S") ratio of 1.1x right now seems quite "middle-of-the-road" for companies in the Consumer Retailing industry in Hong Kong, where the median P/S ratio is around 0.6x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
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View our latest analysis for Cool Link (Holdings)
What Does Cool Link (Holdings)'s Recent Performance Look Like?
For example, consider that Cool Link (Holdings)'s financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. If not, then existing shareholders may be a little nervous about the viability 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 Cool Link (Holdings)'s earnings, revenue and cash flow.
Do Revenue Forecasts Match The P/S Ratio?
Cool Link (Holdings)'s P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.
Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 3.6%. The last three years don't look nice either as the company has shrunk revenue by 17% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.
In contrast to the company, the rest of the industry is expected to grow by 15% over the next year, which really puts the company's recent medium-term revenue decline into perspective.
With this in mind, we find it worrying that Cool Link (Holdings)'s P/S exceeds that of its industry peers. 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
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.
Our look at Cool Link (Holdings) revealed its shrinking revenues over the medium-term haven't impacted the P/S as much as we anticipated, given the industry is set to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.
Plus, you should also learn about these 2 warning signs we've spotted with Cool Link (Holdings) (including 1 which shouldn't be ignored).
Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
