To the annoyance of some shareholders, Neo Telemedia Limited (HKG:8167) shares are down a considerable 28% in the last month, which continues a horrid run for the company. For any long-term shareholders, the last month ends a year to forget by locking in a 84% share price decline.
Even after such a large drop in price, there still wouldn't be many who think Neo Telemedia's price-to-sales (or "P/S") ratio of 0.3x is worth a mention when the median P/S in Hong Kong's Electronic industry is similar at about 0.4x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
SEHK:8167 Price to Sales Ratio vs Industry March 25th 2024
How Has Neo Telemedia Performed Recently?
For example, consider that Neo Telemedia's financial performance has been poor lately as its revenue has been in decline. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.
Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Neo Telemedia will help you shine a light on its historical performance.
What Are Revenue Growth Metrics Telling Us About The P/S?
The only time you'd be comfortable seeing a P/S like Neo Telemedia's is when the company's growth is tracking the industry closely.
In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 15%. This means it has also seen a slide in revenue over the longer-term as revenue is down 20% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.
In contrast to the company, the rest of the industry is expected to grow by 20% over the next year, which really puts the company's recent medium-term revenue decline into perspective.
With this in mind, we find it worrying that Neo Telemedia's P/S exceeds that of its industry peers. 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 Final Word
Neo Telemedia's plummeting stock price has brought its P/S back to a similar region as the rest of the industry. 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.
Our look at Neo Telemedia revealed its shrinking revenues over the medium-term haven't impacted the P/S as much as we anticipated, given the industry is set to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
We don't want to rain on the parade too much, but we did also find 4 warning signs for Neo Telemedia (2 shouldn't be ignored!) that you need to be mindful of.
If these risks are making you reconsider your opinion on Neo Telemedia, 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.