Jiu Rong Holdings Limited (HKG:2358) Held Back By Insufficient Growth Even After Shares Climb 45%

Jiu Rong Holdings Limited (HKG:2358) shares have had a really impressive month, gaining 45% after a shaky period beforehand. Unfortunately, despite the strong performance over the last month, the full year gain of 6.7% isn't as attractive.

Even after such a large jump in price, considering around half the companies operating in Hong Kong's Consumer Durables industry have price-to-sales ratios (or "P/S") above 0.7x, you may still consider Jiu Rong Holdings as an solid investment opportunity with its 0.2x P/S ratio. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

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View our latest analysis for Jiu Rong Holdings

How Jiu Rong Holdings Has Been Performing

Jiu Rong Holdings has been doing a good job lately as it's been growing revenue at a solid pace. It might be that many expect the respectable revenue performance to degrade substantially, which has repressed the P/S. Those who are bullish on Jiu Rong Holdings will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

How Is Jiu Rong Holdings' Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as low as Jiu Rong Holdings' is when the company's growth is on track to lag the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 21%. However, this wasn't enough as the latest three year period has seen the company endure a nasty 14% drop in revenue in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 8.3% shows it's an unpleasant look.

With this in mind, we understand why Jiu Rong Holdings' P/S is lower than most of its industry peers. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

What We Can Learn From Jiu Rong Holdings' P/S?

The latest share price surge wasn't enough to lift Jiu Rong Holdings' P/S close to the industry median. 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.

Our examination of Jiu Rong Holdings confirms that the company's shrinking revenue over the past medium-term is a key factor in its low price-to-sales ratio, given the industry is projected to grow. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. If recent medium-term revenue trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 5 warning signs for Jiu Rong Holdings (4 are concerning) you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.