Regal Partners Holdings Limited's (HKG:1575) 37% Price Boost Is Out Of Tune With Revenues

Regal Partners Holdings Limited (HKG:1575) shareholders would be excited to see that the share price has had a great month, posting a 37% gain and recovering from prior weakness. But the last month did very little to improve the 61% share price decline over the last year.

Following the firm bounce in price, you could be forgiven for thinking Regal Partners Holdings is a stock not worth researching with a price-to-sales ratios (or "P/S") of 1.1x, considering almost half the companies in Hong Kong's Consumer Durables industry have P/S ratios below 0.5x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

View our latest analysis for Regal Partners Holdings

What Does Regal Partners Holdings' P/S Mean For Shareholders?

Revenue has risen at a steady rate over the last year for Regal Partners Holdings, which is generally not a bad outcome. It might be that many expect the reasonable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. However, if this isn't the case, investors might get caught out paying too much for the stock.

How Is Regal Partners Holdings' Revenue Growth Trending?

In order to justify its P/S ratio, Regal Partners Holdings would need to produce impressive growth in excess of the industry.

Retrospectively, the last year delivered a decent 3.9% gain to the company's revenues. However, this wasn't enough as the latest three year period has seen an unpleasant 74% overall drop in revenue. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 11% shows it's an unpleasant look.

With this in mind, we find it worrying that Regal Partners Holdings' P/S exceeds that of its industry peers. 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.

What Does Regal Partners Holdings' P/S Mean For Investors?

The large bounce in Regal Partners Holdings' shares has lifted the company's P/S handsomely. 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.

Our examination of Regal Partners Holdings revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

You need to take note of risks, for example - Regal Partners Holdings has 3 warning signs (and 2 which make us uncomfortable) we think you should know about.

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.