Despite an already strong run, Prosperous Future Holdings Limited (HKG:1259) shares have been powering on, with a gain of 29% in the last thirty days.    Unfortunately, despite the strong performance over the last month, the full year gain of 3.3% isn't as attractive.  

Although its price has surged higher, Prosperous Future Holdings may still be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 0.3x, since almost half of all companies in the Personal Products industry in Hong Kong have P/S ratios greater than 0.9x and even P/S higher than 3x are not unusual.   Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.  

SEHK:1259 Price to Sales Ratio vs Industry March 7th 2024

What Does Prosperous Future Holdings' P/S Mean For Shareholders?

With revenue growth that's exceedingly strong of late, Prosperous Future Holdings has been doing very well.   One possibility is that the P/S ratio is low because investors think this strong revenue growth might actually underperform 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 out of favour.    

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Prosperous Future Holdings will help you shine a light on its historical performance.  

How Is Prosperous Future Holdings' Revenue Growth Trending?  

The only time you'd be truly comfortable seeing a P/S as low as Prosperous Future Holdings' is when the company's growth is on track to lag the industry.  

Taking a look back first, we see that the company grew revenue by an impressive 36% last year.    Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 53% overall.  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 10% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's understandable that Prosperous Future Holdings' P/S would sit below the majority of other companies.  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.  

The Final Word

Prosperous Future Holdings' stock price has surged recently, but its but its P/S still remains modest.      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.

Our examination of Prosperous Future Holdings confirms that the company's shrinking revenue over the past medium-term is a key factor in its low price-to-sales ratio, given the industry is projected to grow.  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 Prosperous Future Holdings (1 is a bit unpleasant!) that you need to be mindful of.  

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.