Some Daisho Microline Holdings Limited (HKG:567) Shareholders Look For Exit As Shares Take 25% Pounding

The Daisho Microline Holdings Limited (HKG:567) share price has softened a substantial 25% over the previous 30 days, handing back much of the gains the stock has made lately. Looking at the bigger picture, even after this poor month the stock is up 37% in the last year.

Even after such a large drop in price, given close to half the companies operating in Hong Kong's Electronic industry have price-to-sales ratios (or "P/S") below 0.3x, you may still consider Daisho Microline Holdings as a stock to potentially avoid with its 2.2x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

We've discovered 2 warning signs about Daisho Microline Holdings. View them for free.

View our latest analysis for Daisho Microline Holdings

What Does Daisho Microline Holdings' P/S Mean For Shareholders?

Revenue has risen firmly for Daisho Microline Holdings recently, which is pleasing to see. It might be that many expect the respectable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders may be a little nervous about the viability of the share price.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Daisho Microline Holdings' earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Daisho Microline Holdings?

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

Taking a look back first, we see that the company grew revenue by an impressive 15% last year. However, this wasn't enough as the latest three year period has seen the company endure a nasty 14% drop in revenue in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

In contrast to the company, the rest of the industry is expected to grow by 17% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that Daisho Microline Holdings 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 Daisho Microline Holdings' P/S

Daisho Microline Holdings' P/S remain high even after its stock plunged. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our examination of Daisho Microline 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. 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. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

You always need to take note of risks, for example - Daisho Microline Holdings has 2 warning signs we think you should be aware of.

If you're unsure about the strength of Daisho Microline Holdings' 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.