When close to half the companies in the Construction industry in Hong Kong have price-to-sales ratios (or "P/S") below 0.3x, you may consider Central New Energy Holding Group Limited (HKG:1735) as a stock to avoid entirely with its 7.7x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for Central New Energy Holding Group

What Does Central New Energy Holding Group's Recent Performance Look Like?

With revenue growth that's exceedingly strong of late, Central New Energy Holding Group has been doing very well. It seems that many are expecting the strong revenue performance to beat most other companies over the coming period, which has increased investors' willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is Central New Energy Holding Group's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Central New Energy Holding Group's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 102% gain to the company's top line. The latest three year period has also seen an incredible overall rise in revenue, aided by its incredible short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

When compared to the industry's one-year growth forecast of 13%, the most recent medium-term revenue trajectory is noticeably more alluring

With this information, we can see why Central New Energy Holding Group is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Key Takeaway

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.

We've established that Central New Energy Holding Group maintains its high P/S on the strength of its recent three-year growth being higher than the wider industry forecast, as expected. In the eyes of shareholders, the probability of a continued growth trajectory is great enough to prevent the P/S from pulling back. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Central New Energy Holding Group with six simple checks on some of these key factors.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.