When close to half the companies in the Insurance industry in Hong Kong have price-to-sales ratios (or "P/S") below 0.4x, you may consider AIA Group Limited (HKG:1299) as a stock to potentially avoid with its 1.8x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for AIA Group

What Does AIA Group's P/S Mean For Shareholders?

Recent times have been advantageous for AIA Group as its revenues have been rising faster than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. If not, then existing shareholders might be a little nervous about the viability of the share price.

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

AIA Group's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Retrospectively, the last year delivered an explosive gain to the company's top line. The latest three year period has also seen a 29% overall rise in revenue, aided extensively by its short-term performance. So while the recent revenue growth has been good for the company, we do note that it does tend to experience some large revenue swings, particularly over the last 12 months.

Shifting to the future, estimates from the analysts covering the company are not good at all, suggesting revenue should decline by 7.6% each year over the next three years. With the rest of the industry predicted to shrink by 1.4% per annum, it's a sub-optimal result.

With this in mind, we find it intriguing that AIA Group's P/S exceeds that of its industry peers. When revenue shrink rapidly often the P/S premium shrinks too, which could set up shareholders for future disappointment. Maintaining these prices will be extremely difficult to achieve as the weak outlook is likely to weigh down the shares eventually.

What We Can Learn From AIA Group's P/S?

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that AIA Group currently trades on a much higher than expected P/S since its revenue forecast is even worse than the struggling industry. When we see a weak revenue outlook, we suspect the share price is at risk of declining, sending the high P/S lower. We're also cautious about the company's ability to resist even greater pain to its business from the broader industry turmoil. Unless there's a material improvement in the forecast revenue growth for the company, it's hard to justify the share price at current levels.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for AIA Group that you should be aware of.

If these risks are making you reconsider your opinion on AIA Group, 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.