Risks Still Elevated At These Prices As Sheng Tang Holdings Limited (HKG:8305) Shares Dive 29%

The Sheng Tang Holdings Limited (HKG:8305) share price has fared very poorly over the last month, falling by a substantial 29%. Longer-term shareholders will rue the drop in the share price, since it's now virtually flat for the year after a promising few quarters.

Although its price has dipped substantially, when almost half of the companies in Hong Kong's Construction industry have price-to-sales ratios (or "P/S") below 0.4x, you may still consider Sheng Tang Holdings as a stock not worth researching with its 3.5x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

Check out our latest analysis for Sheng Tang Holdings

What Does Sheng Tang Holdings' P/S Mean For Shareholders?

For example, consider that Sheng Tang Holdings' financial performance has been pretty ordinary lately as revenue growth is non-existent. It might be that many are expecting an improvement to the uninspiring revenue performance over the coming period, which has kept the P/S from collapsing. If not, then existing shareholders may be a little nervous about the viability of the share price.

How Is Sheng Tang Holdings' Revenue Growth Trending?

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

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. This isn't what shareholders were looking for as it means they've been left with a 25% decline in revenue over the last three years in total. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 9.5% shows it's an unpleasant look.

With this in mind, we find it worrying that Sheng Tang Holdings' P/S exceeds that of its industry peers. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Bottom Line On Sheng Tang Holdings' P/S

A significant share price dive has done very little to deflate Sheng Tang Holdings' very lofty P/S. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Sheng Tang Holdings currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. 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.

Before you take the next step, you should know about the 4 warning signs for Sheng Tang Holdings (2 are potentially serious!) that we have uncovered.

If you're unsure about the strength of Sheng Tang Holdings' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.