There's No Escaping Redco Healthy Living Company Limited's (HKG:2370) Muted Revenues Despite A 37% Share Price Rise

Despite an already strong run, Redco Healthy Living Company Limited (HKG:2370) shares have been powering on, with a gain of 37% in the last thirty days. Taking a wider view, although not as strong as the last month, the full year gain of 15% is also fairly reasonable.

Although its price has surged higher, Redco Healthy Living's price-to-sales (or "P/S") ratio of 0.2x might still make it look like a buy right now compared to the Real Estate industry in Hong Kong, where around half of the companies have P/S ratios above 0.7x and even P/S above 3x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

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See our latest analysis for Redco Healthy Living

How Redco Healthy Living Has Been Performing

For instance, Redco Healthy Living's receding revenue in recent times would have to be some food for thought. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. Those who are bullish on Redco Healthy Living will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

How Is Redco Healthy Living's Revenue Growth Trending?

In order to justify its P/S ratio, Redco Healthy Living would need to produce sluggish growth that's trailing 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 2.7%. Regardless, revenue has managed to lift by a handy 7.3% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 5.3% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Redco Healthy Living is trading at a P/S lower than the industry. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

What Does Redco Healthy Living's P/S Mean For Investors?

Redco Healthy Living's stock price has surged recently, but its but its P/S still remains modest. 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.

As we suspected, our examination of Redco Healthy Living revealed its three-year revenue trends are contributing to its low P/S, given they look worse than current industry expectations. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Redco Healthy Living (at least 2 which can't be ignored), and understanding these should be part of your investment process.

If you're unsure about the strength of Redco Healthy Living's 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.