Sang Hing Holdings (International) Limited's (HKG:1472) 55% Share Price Surge Not Quite Adding Up

The Sang Hing Holdings (International) Limited (HKG:1472) share price has done very well over the last month, posting an excellent gain of 55%. Unfortunately, despite the strong performance over the last month, the full year gain of 9.7% isn't as attractive.

Even after such a large jump in price, it's still not a stretch to say that Sang Hing Holdings (International)'s price-to-sales (or "P/S") ratio of 0.5x right now seems quite "middle-of-the-road" compared to the Construction industry in Hong Kong, where the median P/S ratio is around 0.3x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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See our latest analysis for Sang Hing Holdings (International)

How Has Sang Hing Holdings (International) Performed Recently?

For example, consider that Sang Hing Holdings (International)'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 you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

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

Sang Hing Holdings (International)'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.

Retrospectively, the last year delivered a frustrating 44% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 55% in aggregate. 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 6.3% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's somewhat alarming that Sang Hing Holdings (International)'s P/S sits in line with the majority of other companies. 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 Key Takeaway

Its shares have lifted substantially and now Sang Hing Holdings (International)'s P/S is back within range of the industry median. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

The fact that Sang Hing Holdings (International) currently trades at a P/S on par with the rest of the industry is surprising to us since its recent revenues have been in decline over the medium-term, all while 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. 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's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Sang Hing Holdings (International) (at least 2 which are significant), and understanding these should be part of your investment process.

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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.