Gemilang International Limited (HKG:6163) Stock Rockets 52% As Investors Are Less Pessimistic Than Expected

The Gemilang International Limited (HKG:6163) share price has done very well over the last month, posting an excellent gain of 52%. The last 30 days bring the annual gain to a very sharp 26%.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about Gemilang International's P/S ratio of 0.4x, since the median price-to-sales (or "P/S") ratio for the Machinery industry in Hong Kong is also close to 0.8x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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See our latest analysis for Gemilang International

How Has Gemilang International Performed Recently?

Gemilang International 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 wane, which has kept the share price, and thus the P/S ratio, from rising. Those who are bullish on Gemilang International will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

How Is Gemilang International's Revenue Growth Trending?

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

Retrospectively, the last year delivered an exceptional 36% gain to the company's top line. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 11% 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 14% shows it's an unpleasant look.

With this in mind, we find it worrying that Gemilang International'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. There's a 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 Gemilang International's P/S

Gemilang International's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We find it unexpected that Gemilang International trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It is also worth noting that we have found 4 warning signs for Gemilang International (1 is potentially serious!) that you need to take into consideration.

If these risks are making you reconsider your opinion on Gemilang International, 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.