Hop Fung Group Holdings Limited (HKG:2320) shareholders are no doubt pleased to see that the share price has bounced 26% in the last month, although it is still struggling to make up recently lost ground. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 49% over that time.
Although its price has surged higher, it would still be understandable if you think Hop Fung Group Holdings is a stock with good investment prospects with a price-to-sales ratios (or "P/S") of 0.2x, considering almost half the companies in Hong Kong's Packaging industry have P/S ratios above 0.8x. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.
See our latest analysis for Hop Fung Group Holdings
How Has Hop Fung Group Holdings Performed Recently?
As an illustration, revenue has deteriorated at Hop Fung Group Holdings over the last year, which is not ideal at all. Perhaps the market believes the recent revenue performance isn't good enough to keep up the industry, causing the P/S ratio to suffer. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.Although there are no analyst estimates available for Hop Fung Group Holdings, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.
How Is Hop Fung Group Holdings' Revenue Growth Trending?
Hop Fung Group Holdings' P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.
Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 44%. As a result, revenue from three years ago have also fallen 64% overall. 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 16% shows it's an unpleasant look.
With this in mind, we understand why Hop Fung Group 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.
What We Can Learn From Hop Fung Group Holdings' P/S?
Hop Fung Group Holdings' stock price has surged recently, but its but its P/S still remains modest. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.
As we suspected, our examination of Hop Fung Group Holdings revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set 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.
There are also other vital risk factors to consider and we've discovered 3 warning signs for Hop Fung Group Holdings (1 is concerning!) that you should be aware of before investing here.
If these risks are making you reconsider your opinion on Hop Fung Group 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.