Optimistic Investors Push China Ocean Group Development Limited (HKG:8047) Shares Up 39% But Growth Is Lacking

China Ocean Group Development Limited (HKG:8047) shares have had a really impressive month, gaining 39% after a shaky period beforehand. But the last month did very little to improve the 59% share price decline over the last year.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about China Ocean Group Development's P/S ratio of 0.7x, since the median price-to-sales (or "P/S") ratio for the Logistics industry in Hong Kong is also close to 0.2x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for China Ocean Group Development

What Does China Ocean Group Development's P/S Mean For Shareholders?

China Ocean Group Development has been doing a decent job lately as it's been growing revenue at a reasonable pace. One possibility is that the P/S is moderate because investors think this good revenue growth might only be parallel to the broader industry in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

How Is China Ocean Group Development's Revenue Growth Trending?

In order to justify its P/S ratio, China Ocean Group Development would need to produce growth that's similar to the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 6.3% last year. Still, lamentably revenue has fallen 31% in aggregate from three years ago, which is disappointing. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 10% shows it's an unpleasant look.

With this information, we find it concerning that China Ocean Group Development is trading at a fairly similar P/S compared to 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. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What Does China Ocean Group Development's P/S Mean For Investors?

China Ocean Group Development appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry 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.

Our look at China Ocean Group Development 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. 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.

It is also worth noting that we have found 4 warning signs for China Ocean Group Development (2 are concerning!) that you need to take into consideration.

If you're unsure about the strength of China Ocean Group Development's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.