Not many would find it noteworthy that Pangaea Connectivity Technology Limited (HKG:1473) has a P/S (price to sales) ratio of 0.2x, compared to the median P/S for the Hong Kong electronics industry of around 0.4x. This may not seem like a big deal, but if the P/S ratio is not justified, investors could be missing out on potential opportunities or ignoring looming disappointments.
Read our latest analysis on Pangaea Connectivity Technology
SEHK:1473 Price to Sales Ratio by Industry 2024-08-26
What does Pangaea Connectivity Technology's P/S mean for shareholders?
Pangaea Connectivity Technology has been doing well recently, growing its earnings at a solid pace. One possibility is that the P/S is moderate because investors believe that this respectable earnings growth is not enough to outperform the broader industry in the near future. If you're interested in this company, you'd hope that's not the case, so you might be able to buy shares while things aren't going so well.
Want the full picture of the company's earnings, revenue and cash flow? Our free report on Pangaea Connectivity Technology will help shed light on the company's past performance.
Do earnings forecasts line up with the P/S ratio?
There is an inherent assumption that for a P/S ratio like Pangaea Connectivity Technology's to be considered reasonable, a company needs to be comparable to its industry.
Looking back at revenue growth over the last year, the company recorded an impressive 15% growth. Despite this recent strong growth, the company is still struggling to catch up, with a frustrating three-year revenue decline of 11% overall. Therefore, it's fair to say that recent revenue growth has been unwelcome for the company.
In contrast to the company, the broader industry is expected to grow at 22% over the next 12 months, which nicely accounts for the company's recent medium-term revenue decline.
With this in mind, it is somewhat worrying that Pangaea Connectivity Technology's P/S is in line with the majority of other companies. Many of the company's investors are not as bearish as recent developments would suggest, and are not looking to exit the stock at this time. If the P/S were to fall to the same level as the recent negative growth rate, existing shareholders would likely be disappointed in the future.
Final Words
The power of the price-to-sales multiple is not primarily as a valuation tool, but rather as a gauge of current investor sentiment and future expectations.
We are surprised to see Pangaea Connectivity Technology trading at a P/S ratio in line with the rest of the industry, despite revenues declining over the medium term as the industry as a whole is expected to grow. Although in line with the broader industry, we are concerned about the current P/S ratio as this dismal revenue track record is unlikely to support more positive sentiment for long. It would not be wrong to expect tough times ahead for the company's shareholders unless recent mid-term conditions improve.
You should always think about the risks, as an example, we've spotted 5 warning signs for Pangaea Connectivity Technology you should be aware of, and 1 of them is significant.
If you're not convinced about the strength of Pangaea Connectivity Technology's business, why not check out this interactive list of other companies with solid business fundamentals you might be missing out on.
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This article by Simply Wall St is of general nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology, and our articles are not intended as financial advice. It is not a recommendation to buy or sell a stock, and does not take into account your objectives or financial situation. We aim to provide long-term analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned herein.
