BGMC International Limited (HKG:1693) shareholders have had their patience rewarded with a 29% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 61%.

After such a large jump in price, you could be forgiven for thinking BGMC International is a stock not worth researching with a price-to-sales ratios (or "P/S") of 1.1x, considering almost half the companies in Hong Kong's Construction industry have P/S ratios below 0.3x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

How BGMC International Has Been Performing

As an illustration, revenue has deteriorated at BGMC International over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is BGMC International's Revenue Growth Trending?

In order to justify its P/S ratio, BGMC International would need to produce impressive growth in excess of the industry.

Retrospectively, the last year delivered a frustrating 67% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 67% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 9.7% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this information, we find it concerning that BGMC International is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very 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 Key Takeaway

BGMC International's P/S is on the rise since its shares have risen strongly. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that BGMC International currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

Before you take the next step, you should know about the 3 warning signs for BGMC International (1 doesn't sit too well with us!) that we have uncovered.

If you're unsure about the strength of BGMC International's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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