Greenheart Group Limited (HKG:94) shareholders have had their patience rewarded with a 27% share price jump in the last month. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 25% over that time.

Following the firm bounce in price, when almost half of the companies in Hong Kong's Forestry industry have price-to-sales ratios (or "P/S") below 0.6x, you may consider Greenheart Group as a stock probably not worth researching with its 1.1x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

What Does Greenheart Group's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Greenheart Group 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. However, if this isn't the case, investors might get caught out paying too much for the stock.

How Is Greenheart Group's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as high as Greenheart Group's is when the company's growth is on track to outshine the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 45%. The last three years don't look nice either as the company has shrunk revenue by 72% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 12% shows it's an unpleasant look.

With this in mind, we find it worrying that Greenheart Group's P/S exceeds that of its industry peers. 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 Bottom Line On Greenheart Group's P/S

Greenheart Group'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.

Our examination of Greenheart Group revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Greenheart Group, and understanding them should be part of your investment process.

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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