Goodbaby International Holdings Limited (HKG:1086) Soars 29% But It's A Story Of Risk Vs Reward

Goodbaby International Holdings Limited (HKG:1086) shares have continued their recent momentum with a 29% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 76%.

Even after such a large jump in price, when close to half the companies operating in Hong Kong's Leisure industry have price-to-sales ratios (or "P/S") above 0.7x, you may still consider Goodbaby International Holdings as an enticing stock to check out with its 0.2x 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 limited.

Check out our latest analysis for Goodbaby International Holdings

How Goodbaby International Holdings Has Been Performing

Goodbaby International Holdings could be doing better as it's been growing revenue less than most other companies lately. Perhaps the market is expecting the current trend of poor revenue growth to continue, which has kept the P/S suppressed. If you still like the company, you'd be hoping revenue doesn't get any worse and that you could pick up some stock while it's out of favour.

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

In order to justify its P/S ratio, Goodbaby International Holdings would need to produce sluggish growth that's trailing the industry.

Retrospectively, the last year delivered a decent 5.3% gain to the company's revenues. Still, lamentably revenue has fallen 11% 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.

Looking ahead now, revenue is anticipated to climb by 11% during the coming year according to the only analyst following the company. With the industry predicted to deliver 11% growth , the company is positioned for a comparable revenue result.

With this in consideration, we find it intriguing that Goodbaby International Holdings' P/S is lagging behind its industry peers. It may be that most investors are not convinced the company can achieve future growth expectations.

The Key Takeaway

The latest share price surge wasn't enough to lift Goodbaby International Holdings' P/S close to the industry median. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've seen that Goodbaby International Holdings currently trades on a lower than expected P/S since its forecast growth is in line with the wider industry. Despite average revenue growth estimates, there could be some unobserved threats keeping the P/S low. It appears some are indeed anticipating revenue instability, because these conditions should normally provide more support to the share price.

Plus, you should also learn about these 3 warning signs we've spotted with Goodbaby International Holdings (including 1 which is potentially serious).

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.

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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.