China Dongxiang (Group) Co., Ltd. (HKG:3818) Stock Rockets 30% As Investors Are Less Pessimistic Than Expected

China Dongxiang (Group) Co., Ltd. (HKG:3818) shareholders have had their patience rewarded with a 30% share price jump in the last month. Unfortunately, despite the strong performance over the last month, the full year gain of 9.3% isn't as attractive.

Following the firm bounce in price, given close to half the companies operating in Hong Kong's Luxury industry have price-to-sales ratios (or "P/S") below 0.6x, you may consider China Dongxiang (Group) as a stock to potentially avoid with its 1.3x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for China Dongxiang (Group)

How China Dongxiang (Group) Has Been Performing

For example, consider that China Dongxiang (Group)'s financial performance has been pretty ordinary lately as revenue growth is non-existent. Perhaps the market believes that revenue growth will improve markedly over current levels, inflating the P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is China Dongxiang (Group)'s Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as high as China Dongxiang (Group)'s is when the company's growth is on track to outshine the industry.

Retrospectively, the last year delivered virtually the same number to the company's top line as the year before. This isn't what shareholders were looking for as it means they've been left with a 14% decline in revenue over the last three years in total. 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 17% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this information, we find it concerning that China Dongxiang (Group) is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very 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.

The Bottom Line On China Dongxiang (Group)'s P/S

The large bounce in China Dongxiang (Group)'s shares has lifted the company's P/S handsomely. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that China Dongxiang (Group) currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with China Dongxiang (Group), and understanding these should be part of your investment process.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.