There's Reason For Concern Over Redco Healthy Living Company Limited's (HKG:2370) Massive 56% Price Jump

Redco Healthy Living Company Limited (HKG:2370) shares have continued their recent momentum with a 56% gain in the last month alone. The last month tops off a massive increase of 127% in the last year.

Even after such a large jump in price, it's still not a stretch to say that Redco Healthy Living's price-to-sales (or "P/S") ratio of 0.3x right now seems quite "middle-of-the-road" compared to the Real Estate industry in Hong Kong, where the median P/S ratio is around 0.7x. 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 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 company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

What Are Revenue Growth Metrics Telling Us About The P/S?

In order to justify its P/S ratio, Redco Healthy Living would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a frustrating 2.7% decrease to the company's top line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 7.3% overall rise in revenue. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

Comparing that to the industry, which is predicted to deliver 5.4% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

In light of this, it's curious that Redco Healthy Living's P/S sits in line with the majority of other companies. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Bottom Line On Redco Healthy Living's P/S

Its shares have lifted substantially and now Redco Healthy Living's P/S is back within range of the industry median. 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.

We've established that Redco Healthy Living's average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Having said that, be aware Redco Healthy Living is showing 3 warning signs in our investment analysis, and 2 of those shouldn't be ignored.

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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.