Revenues Not Telling The Story For Affluent Foundation Holdings Limited (HKG:1757)

Affluent Foundation Holdings Limited's (HKG:1757) price-to-sales (or "P/S") ratio of 2.1x may not look like an appealing investment opportunity when you consider close to half the companies in the Construction industry in Hong Kong have P/S ratios below 0.3x. 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 Affluent Foundation Holdings

What Does Affluent Foundation Holdings' P/S Mean For Shareholders?

The revenue growth achieved at Affluent Foundation Holdings over the last year would be more than acceptable for most companies. It might be that many expect the respectable 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.

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Affluent Foundation Holdings' to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 21% last year. However, this wasn't enough as the latest three year period has seen the company endure a nasty 53% drop in revenue in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 18% 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 Affluent Foundation Holdings' 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

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Affluent Foundation 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. 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. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you settle on your opinion, we've discovered 3 warning signs for Affluent Foundation Holdings (1 is a bit unpleasant!) that you should be aware of.

If you're unsure about the strength of Affluent Foundation 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.