TBK & Sons Holdings Limited's (HKG:1960) 26% Share Price Surge Not Quite Adding Up

TBK & Sons Holdings Limited (HKG:1960) shares have had a really impressive month, gaining 26% after a shaky period beforehand. The last month tops off a massive increase of 114% in the last year.

After such a large jump in price, you could be forgiven for thinking TBK & Sons Holdings is a stock not worth researching with a price-to-sales ratios (or "P/S") of 1.4x, considering almost half the companies in Hong Kong's Energy Services industry have P/S ratios below 0.4x. 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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View our latest analysis for TBK & Sons Holdings

What Does TBK & Sons Holdings' Recent Performance Look Like?

For instance, TBK & Sons Holdings' receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is TBK & Sons Holdings' Revenue Growth Trending?

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

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 66%. As a result, revenue from three years ago have also fallen 88% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 7.9% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's alarming that TBK & Sons Holdings' P/S sits above the majority of other companies. 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.

What We Can Learn From TBK & Sons Holdings' P/S?

The large bounce in TBK & Sons Holdings' shares has lifted the company's P/S handsomely. 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've established that TBK & Sons Holdings currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. 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.

Having said that, be aware TBK & Sons Holdings is showing 3 warning signs in our investment analysis, and 1 of those can't be ignored.

If these risks are making you reconsider your opinion on TBK & Sons Holdings, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.