C Cheng Holdings Limited (HKG:1486) shareholders have had their patience rewarded with a 68% share price jump in the last month.    Looking back a bit further, it's encouraging to see the stock is up 73% in the last year.  

Even after such a large jump in price, it's still not a stretch to say that C Cheng Holdings' price-to-sales (or "P/S") ratio of 0.5x right now seems quite "middle-of-the-road" compared to the Professional Services industry in Hong Kong, where the median P/S ratio is around 1x.  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.    

See our latest analysis for C Cheng Holdings

SEHK:1486 Price to Sales Ratio vs Industry November 16th 2023

How Has C Cheng Holdings Performed Recently?

For example, consider that C Cheng Holdings' financial performance has been poor lately as its revenue has been in decline.   One possibility is that the P/S is moderate because investors think the company might still do enough to be in line with the broader industry in the near future.  If not, then existing shareholders may be a little nervous about the viability of the share price.    

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on C Cheng Holdings' earnings, revenue and cash flow.  

Do Revenue Forecasts Match The P/S Ratio?  

C Cheng Holdings' P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.  

Retrospectively, the last year delivered a frustrating 17% decrease to the company's top line.   The last three years don't look nice either as the company has shrunk revenue by 5.0% in aggregate.  Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.  

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

In light of this, it's somewhat alarming that C Cheng Holdings' P/S sits in line with the majority of other companies.  Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now.  There's a 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 Key Takeaway

Its shares have lifted substantially and now C Cheng Holdings' P/S is back within range of the industry median.      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.

The fact that C Cheng Holdings currently trades at a P/S on par with the rest of the industry is surprising to us since its recent revenues have been in decline over the medium-term, all while the industry is set to grow.  When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower.  Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.    

We don't want to rain on the parade too much, but we did also find 2 warning signs for C Cheng Holdings (1 is a bit concerning!) that you need to be mindful of.  

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.