Sheen Tai Holdings Group Company Limited (HKG:1335) shareholders would be excited to see that the share price has had a great month, posting a 59% gain and recovering from prior weakness. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 15% in the last twelve months.

Even after such a large jump in price, there still wouldn't be many who think Sheen Tai Holdings Group's price-to-sales (or "P/S") ratio of 0.6x is worth a mention when the median P/S in Hong Kong's Packaging industry is similar at about 0.8x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

What Does Sheen Tai Holdings Group's P/S Mean For Shareholders?

With revenue growth that's exceedingly strong of late, Sheen Tai Holdings Group has been doing very well. The P/S is probably moderate because investors think this strong revenue growth might not be enough to outperform the broader industry in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

How Is Sheen Tai Holdings Group's Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Sheen Tai Holdings Group's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 34% 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.

This is in contrast to the rest of the industry, which is expected to grow by 20% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's curious that Sheen Tai Holdings Group's P/S sits in line with the majority of other companies. Apparently some shareholders believe the recent performance is at its limits and have been accepting lower selling prices.

What We Can Learn From Sheen Tai Holdings Group's P/S?

Sheen Tai Holdings Group appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry 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.

We've established that Sheen Tai Holdings Group currently trades on a lower than expected P/S since its recent three-year growth is higher than the wider industry forecast. When we see strong revenue with faster-than-industry growth, we can only assume potential risks are what might be placing pressure on the P/S ratio. While recent revenue trends over the past medium-term suggest that the risk of a price decline is low, investors appear to see the likelihood of revenue fluctuations in the future.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Sheen Tai Holdings Group (at least 1 which is potentially serious), and understanding them should be part of your investment process.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.