Hong Kong Robotics Group Holding Limited's (HKG:370) Popularity With Investors Is Under Threat From Overpricing

Hong Kong Robotics Group Holding Limited's (HKG:370) price-to-sales (or "P/S") ratio of 24.9x may look like a poor investment opportunity when you consider close to half the companies in the Retail Distributors industry in Hong Kong have P/S ratios below 1.1x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

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See our latest analysis for Hong Kong Robotics Group Holding

How Hong Kong Robotics Group Holding Has Been Performing

For instance, Hong Kong Robotics Group Holding's receding revenue in recent times would have to be some food for thought. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. If not, then existing shareholders may be quite nervous about the viability of the share price.

How Is Hong Kong Robotics Group Holding's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Hong Kong Robotics Group Holding'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 46%. As a result, revenue from three years ago have also fallen 86% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 24% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we find it worrying that Hong Kong Robotics Group Holding's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

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.

Our examination of Hong Kong Robotics Group Holding 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 the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

It is also worth noting that we have found 2 warning signs for Hong Kong Robotics Group Holding (1 is a bit concerning!) that you need to take into consideration.

If you're unsure about the strength of Hong Kong Robotics Group Holding'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.