Jiu Rong Holdings Limited (HKG:2358) Shares Fly 45% But Investors Aren't Buying For Growth

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.

Although its price has surged higher, 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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Check out our latest analysis for Jiu Rong Holdings

What Does Jiu Rong Holdings' P/S Mean For Shareholders?

The revenue growth achieved at Jiu Rong Holdings over the last year would be more than acceptable for most companies. One possibility is that the P/S is low because investors think this respectable revenue growth might actually underperform the broader industry in the near future. 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.

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

There's an inherent assumption that a company should underperform the industry for P/S ratios like Jiu Rong Holdings' to be considered reasonable.

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. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Final Word

Despite Jiu Rong Holdings' share price climbing recently, its P/S still lags most other companies. 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.

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.

Before you take the next step, you should know about the 5 warning signs for Jiu Rong Holdings (4 are concerning!) that we have uncovered.

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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.