New Century Healthcare Holding Co. Limited's (HKG:1518) Subdued P/S Might Signal An Opportunity

There wouldn't be many who think New Century Healthcare Holding Co. Limited's (HKG:1518) price-to-sales (or "P/S") ratio of 0.5x is worth a mention when the median P/S for the Healthcare industry in Hong Kong is similar at about 1x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for New Century Healthcare Holding

How Has New Century Healthcare Holding Performed Recently?

New Century Healthcare Holding has been doing a good job lately as it's been growing revenue at a solid pace. One possibility is that the P/S is moderate because investors think this respectable revenue growth might not be enough to outperform 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 not quite in favour.

Do Revenue Forecasts Match The P/S Ratio?

There's an inherent assumption that a company should be matching the industry for P/S ratios like New Century Healthcare Holding's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 21% gain to the company's top line. The latest three year period has also seen an excellent 60% overall rise in revenue, aided by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Comparing that to the industry, which is only predicted to deliver 11% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised revenue results.

With this information, we find it interesting that New Century Healthcare Holding is trading at a fairly similar P/S compared to the industry. It may be that most investors are not convinced the company can maintain its recent growth rates.

The Key Takeaway

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that New Century Healthcare Holding currently trades on a lower than expected P/S since its recent three-year growth is higher than the wider industry forecast. There could be some unobserved threats to revenue preventing the P/S ratio from matching this positive performance. While recent revenue trends over the past medium-term suggest that the risk of a price decline is low, investors appear to see the likelihood of revenue fluctuations in the future.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for New Century Healthcare Holding that you should be aware of.

If these risks are making you reconsider your opinion on New Century Healthcare Holding, 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.