Some Confidence Is Lacking In Heng Tai Consumables Group Limited (HKG:197) As Shares Slide 34%

Heng Tai Consumables Group Limited (HKG:197) shareholders won't be pleased to see that the share price has had a very rough month, dropping 34% and undoing the prior period's positive performance. Longer-term, the stock has been solid despite a difficult 30 days, gaining 15% in the last year.

In spite of the heavy fall in price, there still wouldn't be many who think Heng Tai Consumables Group's price-to-sales (or "P/S") ratio of 0.2x is worth a mention when the median P/S in Hong Kong's Consumer Retailing industry is similar at about 0.6x. 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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View our latest analysis for Heng Tai Consumables Group

What Does Heng Tai Consumables Group's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Heng Tai Consumables Group over the last year, which is not ideal at all. One possibility is that the P/S is moderate because investors think the company might still do enough to be in line with the broader industry in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

How Is Heng Tai Consumables Group's Revenue Growth Trending?

In order to justify its P/S ratio, Heng Tai Consumables Group would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a frustrating 3.2% decrease to the company's top line. As a result, revenue from three years ago have also fallen 15% overall. 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 15% 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 Heng Tai Consumables Group is trading at a fairly similar P/S compared to the industry. 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.

The Final Word

Following Heng Tai Consumables Group's share price tumble, its P/S is just clinging on to the industry median P/S. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We find it unexpected that Heng Tai Consumables Group 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. 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.

We don't want to rain on the parade too much, but we did also find 4 warning signs for Heng Tai Consumables Group (1 is potentially serious!) that you need to be mindful of.

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.