There's Reason For Concern Over TBK & Sons Holdings Limited's (HKG:1960) Massive 32% Price Jump

Despite an already strong run, TBK & Sons Holdings Limited (HKG:1960) shares have been powering on, with a gain of 32% in the last thirty days. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

Even after such a large jump in price, there still wouldn't be many who think TBK & Sons Holdings' price-to-sales (or "P/S") ratio of 0.5x is worth a mention when it essentially matches the median P/S in Hong Kong's Energy Services industry. 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 TBK & Sons Holdings

How TBK & Sons Holdings Has Been Performing

With revenue growth that's exceedingly strong of late, TBK & Sons 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.

Is There Some Revenue Growth Forecasted For TBK & Sons Holdings?

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

Retrospectively, the last year delivered an exceptional 105% gain to the company's top line. However, this wasn't enough as the latest three year period has seen the company endure a nasty 43% drop in revenue in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 9.8% shows it's an unpleasant look.

With this in mind, we find it worrying that TBK & Sons Holdings' P/S exceeds that of its industry peers. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

What We Can Learn From TBK & Sons Holdings' P/S?

TBK & Sons 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 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.

We find it unexpected that TBK & Sons Holdings 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. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. 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.

Before you take the next step, you should know about the 3 warning signs for TBK & Sons Holdings (1 doesn't sit too well with us!) that we have uncovered.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.