To the annoyance of some shareholders, Narnia (Hong Kong) Group Company Limited (HKG:8607) shares are down a considerable 26% 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 92% share price decline.  

Following the heavy fall in price, considering around half the companies operating in Hong Kong's Luxury industry have price-to-sales ratios (or "P/S") above 0.6x, you may consider Narnia (Hong Kong) Group as an solid investment opportunity with its 0.1x P/S ratio.   However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.  

SEHK:8607 Price to Sales Ratio vs Industry March 27th 2024

How Has Narnia (Hong Kong) Group Performed Recently?

For example, consider that Narnia (Hong Kong) Group's financial performance has been poor lately as its revenue has been in decline.   One possibility is that the P/S is low because investors think the company won't do enough to avoid underperforming the broader industry in the near future.  Those who are bullish on Narnia (Hong Kong) Group will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.    

Although there are no analyst estimates available for Narnia (Hong Kong) Group, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.  

How Is Narnia (Hong Kong) Group's Revenue Growth Trending?  

Narnia (Hong Kong) Group's 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 36%.   This means it has also seen a slide in revenue over the longer-term as revenue is down 21% in total over the last three years.  Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.  

In contrast to the company, the rest of the industry is expected to grow by 12% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we are not surprised that Narnia (Hong Kong) Group is trading at a P/S lower than the industry.  However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment.  Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.  

What Does Narnia (Hong Kong) Group's P/S Mean For Investors?

Narnia (Hong Kong) Group's P/S has taken a dip along with its share price.      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.

It's no surprise that Narnia (Hong Kong) Group maintains its low P/S off the back of its sliding revenue over the medium-term.  At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio.  Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.    

We don't want to rain on the parade too much, but we did also find 2 warning signs for Narnia (Hong Kong) Group that you need to be mindful of.  

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.