Revenues Not Telling The Story For Geotech Holdings Ltd. (HKG:1707) After Shares Rise 26%

The Geotech Holdings Ltd. (HKG:1707) share price has done very well over the last month, posting an excellent gain of 26%. Looking back a bit further, it's encouraging to see the stock is up 79% in the last year.

After such a large jump in price, given close to half the companies operating in Hong Kong's Construction industry have price-to-sales ratios (or "P/S") below 0.3x, you may consider Geotech Holdings as a stock to potentially avoid with its 1.9x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

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See our latest analysis for Geotech Holdings

How Has Geotech Holdings Performed Recently?

The recent revenue growth at Geotech Holdings would have to be considered satisfactory if not spectacular. It might be that many expect the reasonable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. However, if this isn't the case, investors might get caught out paying too much for the stock.

Is There Enough Revenue Growth Forecasted For Geotech Holdings?

Geotech Holdings' P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 4.0%. Still, lamentably revenue has fallen 70% in aggregate from three years ago, which is disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 16% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that Geotech Holdings is trading at a P/S higher than the industry. 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 very 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 Key Takeaway

The large bounce in Geotech Holdings' shares has lifted the company's P/S handsomely. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our examination of Geotech Holdings 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. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. 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's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Geotech Holdings, and understanding these should be part of your investment process.

If you're unsure about the strength of Geotech Holdings' 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.