Investors Appear Satisfied With Mexan Limited's (HKG:22) Prospects As Shares Rocket 62%

Despite an already strong run, Mexan Limited (HKG:22) shares have been powering on, with a gain of 62% in the last thirty days. The last 30 days were the cherry on top of the stock's 309% gain in the last year, which is nothing short of spectacular.

After such a large jump in price, when almost half of the companies in Hong Kong's Hospitality industry have price-to-sales ratios (or "P/S") below 0.7x, you may consider Mexan as a stock not worth researching with its 2.9x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

We've discovered 2 warning signs about Mexan. View them for free.

View our latest analysis for Mexan

What Does Mexan's P/S Mean For Shareholders?

For example, consider that Mexan's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

Although there are no analyst estimates available for Mexan, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Mexan's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Mexan's to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 13%. The latest three year period has seen an incredible overall rise in revenue, a stark contrast to the last 12 months. Therefore, it's fair to say the revenue growth recently has been superb for the company, but investors will want to ask why it is now in decline.

Comparing that recent medium-term revenue trajectory with the industry's one-year growth forecast of 14% shows it's noticeably more attractive.

With this information, we can see why Mexan is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Final Word

The strong share price surge has lead to Mexan's P/S soaring as well. 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.

As we suspected, our examination of Mexan revealed its three-year revenue trends are contributing to its high P/S, given they look better than current industry expectations. In the eyes of shareholders, the probability of a continued growth trajectory is great enough to prevent the P/S from pulling back. Barring any significant changes to the company's ability to make money, the share price should continue to be propped up.

You should always think about risks. Case in point, we've spotted 2 warning signs for Mexan you should be aware of, and 1 of them doesn't sit too well with us.

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.