Subdued Growth No Barrier To Chongqing Iron & Steel Company Limited (HKG:1053) With Shares Advancing 90%

Simply Wall St · 10/16 22:39

The Chongqing Iron & Steel Company Limited (HKG:1053) share price has done very well over the last month, posting an excellent gain of 90%. The last 30 days bring the annual gain to a very sharp 39%.

Even after such a large jump in price, there still wouldn't be many who think Chongqing Iron & Steel's price-to-sales (or "P/S") ratio of 0.3x is worth a mention when the median P/S in Hong Kong's Metals and Mining industry is similar at about 0.5x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

View our latest analysis for Chongqing Iron & Steel

ps-multiple-vs-industry
SEHK:1053 Price to Sales Ratio vs Industry October 16th 2024

How Has Chongqing Iron & Steel Performed Recently?

For example, consider that Chongqing Iron & Steel's financial performance has been poor lately as its revenue has been in decline. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Chongqing Iron & Steel's earnings, revenue and cash flow.

How Is Chongqing Iron & Steel's Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Chongqing Iron & Steel's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 16% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 7.8% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 14% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that Chongqing Iron & Steel's P/S exceeds that of its industry peers. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

What We Can Learn From Chongqing Iron & Steel's P/S?

Chongqing Iron & Steel's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We find it unexpected that Chongqing Iron & Steel trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. 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 is also worth noting that we have found 2 warning signs for Chongqing Iron & Steel (1 can't be ignored!) that you need to take into consideration.

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.