There's No Escaping China Ever Grand Financial Leasing Group Co., Ltd.'s (HKG:379) Muted Revenues Despite A 38% Share Price Rise

China Ever Grand Financial Leasing Group Co., Ltd. (HKG:379) shareholders are no doubt pleased to see that the share price has bounced 38% in the last month, although it is still struggling to make up recently lost ground. Notwithstanding the latest gain, the annual share price return of 8.3% isn't as impressive.

Even after such a large jump in price, China Ever Grand Financial Leasing Group's price-to-sales (or "P/S") ratio of 1.1x might still make it look like a buy right now compared to the Diversified Financial industry in Hong Kong, where around half of the companies have P/S ratios above 1.8x and even P/S above 5x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

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See our latest analysis for China Ever Grand Financial Leasing Group

How China Ever Grand Financial Leasing Group Has Been Performing

China Ever Grand Financial Leasing Group certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. It might be that many expect the strong revenue performance to degrade substantially, which has repressed the P/S ratio. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Do Revenue Forecasts Match The Low P/S Ratio?

There's an inherent assumption that a company should underperform the industry for P/S ratios like China Ever Grand Financial Leasing Group's to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 92% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 18% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 29% shows it's an unpleasant look.

With this information, we are not surprised that China Ever Grand Financial Leasing Group is trading at a P/S lower than the industry. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

The Final Word

The latest share price surge wasn't enough to lift China Ever Grand Financial Leasing Group's P/S close to the industry median. 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.

As we suspected, our examination of China Ever Grand Financial Leasing Group revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. Given the current circumstances, it seems unlikely that the share price will experience any significant movement in either direction in the near future if recent medium-term revenue trends persist.

We don't want to rain on the parade too much, but we did also find 3 warning signs for China Ever Grand Financial Leasing Group (1 is a bit concerning!) that you need to be mindful of.

If you're unsure about the strength of China Ever Grand Financial Leasing Group's 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.