When you see that almost half of the companies in the Construction industry in Hong Kong have price-to-sales ratios (or "P/S") below 0.3x, AB Builders Group Limited (HKG:1615) looks to be giving off some sell signals with its 1.4x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

Check out our latest analysis for AB Builders Group

How AB Builders Group Has Been Performing

As an illustration, revenue has deteriorated at AB Builders Group over the last year, which is not ideal at all. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. However, if this isn't the case, investors might get caught out paying too much for the stock.

Although there are no analyst estimates available for AB Builders Group, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For AB Builders Group?

In order to justify its P/S ratio, AB Builders Group would need to produce impressive growth in excess of the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 8.7%. This means it has also seen a slide in revenue over the longer-term as revenue is down 44% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

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 AB Builders Group 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 Final Word

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of AB Builders Group revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. 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.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for AB Builders Group that you should be aware of.

If you're unsure about the strength of AB Builders Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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