Smart City Development Holdings Limited (HKG:8268) Stock Rockets 30% As Investors Are Less Pessimistic Than Expected

Smart City Development Holdings Limited (HKG:8268) shares have continued their recent momentum with a 30% gain in the last month alone. The last month tops off a massive increase of 178% in the last year.

After such a large jump in price, given close to half the companies operating in Hong Kong's Construction industry have price-to-sales ratios (or "P/S") below 0.2x, you may consider Smart City Development Holdings as a stock to potentially avoid with its 0.8x P/S ratio. 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.

Check out our latest analysis for Smart City Development Holdings

How Has Smart City Development Holdings Performed Recently?

The revenue growth achieved at Smart City Development Holdings over the last year would be more than acceptable for most companies. One possibility is that the P/S ratio is high because investors think this respectable revenue growth will be enough to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Is There Enough Revenue Growth Forecasted For Smart City Development Holdings?

Smart City Development Holdings' P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Retrospectively, the last year delivered an exceptional 17% gain to the company's top line. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 26% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 8.8% shows it's an unpleasant look.

With this information, we find it concerning that Smart City Development Holdings is trading at a P/S higher than the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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

Smart City Development Holdings' P/S is on the rise since its shares have risen strongly. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that Smart City Development Holdings currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

Plus, you should also learn about these 4 warning signs we've spotted with Smart City Development Holdings (including 2 which make us uncomfortable).

If these risks are making you reconsider your opinion on Smart City Development Holdings, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.