China New Holdings Limited (HKG:8125) Stocks Pounded By 27% But Not Lagging Industry On Growth Or Pricing

The China New Holdings Limited (HKG:8125) share price has fared very poorly over the last month, falling by a substantial 27%. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 76% loss during that time.

In spite of the heavy fall in price, you could still be forgiven for feeling indifferent about China New Holdings' P/S ratio of 0.5x, since the median price-to-sales (or "P/S") ratio for the Professional Services industry in Hong Kong is about the same. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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View our latest analysis for China New Holdings

How China New Holdings Has Been Performing

With revenue growth that's exceedingly strong of late, China New Holdings has been doing very well. Perhaps the market is expecting future revenue performance to taper off, which has kept the P/S from rising. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

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

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

Retrospectively, the last year delivered an exceptional 48% gain to the company's top line. Revenue has also lifted 27% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Weighing that recent medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 8.9% shows it's about the same on an annualised basis.

With this information, we can see why China New Holdings is trading at a fairly similar P/S to the industry. It seems most investors are expecting to see average growth rates continue into the future and are only willing to pay a moderate amount for the stock.

The Bottom Line On China New Holdings' P/S

Following China New Holdings' share price tumble, its P/S is just clinging on to the industry median P/S. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

It appears to us that China New Holdings maintains its moderate P/S off the back of its recent three-year growth being in line with the wider industry forecast. With previous revenue trends that keep up with the current industry outlook, it's hard to justify the company's P/S ratio deviating much from it's current point. Unless the recent medium-term conditions change, they will continue to support the share price at these levels.

You should always think about risks. Case in point, we've spotted 3 warning signs for China New Holdings you should be aware of.

If these risks are making you reconsider your opinion on China New Holdings, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.