Revenues Not Telling The Story For Chong Fai Jewellery Group Holdings Company Limited (HKG:8537) After Shares Rise 27%

Chong Fai Jewellery Group Holdings Company Limited (HKG:8537) shares have continued their recent momentum with a 27% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 38%.

In spite of the firm bounce in price, it's still not a stretch to say that Chong Fai Jewellery Group Holdings' price-to-sales (or "P/S") ratio of 0.5x right now seems quite "middle-of-the-road" compared to the Luxury industry in Hong Kong, where the median P/S ratio is around 0.7x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

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Check out our latest analysis for Chong Fai Jewellery Group Holdings

How Has Chong Fai Jewellery Group Holdings Performed Recently?

For example, consider that Chong Fai Jewellery Group Holdings' financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is moderate because investors think the company might still do enough to be in line with the broader industry in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

Is There Some Revenue Growth Forecasted For Chong Fai Jewellery Group Holdings?

Chong Fai Jewellery Group Holdings' P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 5.3%. Regardless, revenue has managed to lift by a handy 25% in aggregate from three years ago, thanks to the earlier period of growth. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 39% shows it's noticeably less attractive.

With this information, we find it interesting that Chong Fai Jewellery Group Holdings is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What We Can Learn From Chong Fai Jewellery Group Holdings' P/S?

Chong Fai Jewellery Group Holdings appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry 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.

We've established that Chong Fai Jewellery Group Holdings' average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. Unless the recent medium-term conditions improve, it's hard to accept the current share price as fair value.

Don't forget that there may be other risks. For instance, we've identified 5 warning signs for Chong Fai Jewellery Group Holdings (3 can't be ignored) you should be aware of.

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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.