A piece of the puzzle is missing in the 38% share price rise of ELL Environmental Holdings Limited (HKG:1395)

ELL Environmental Holdings Limited (HKG:1395) shares have continued their recent momentum with a 38% gain in the past month alone. Still, the 30-day jump doesn’t change the fact that longer-term shareholders have seen their shares decimated by the 56% share price drop in the past twelve months.

Even though the price has gone up, there still aren’t many who think ELL Environmental Holdings’ price-to-sales ratio (or ‘P/S’) of 0.8x is worth mentioning as the average P/S in Hong Kong rises. The water sector is comparable at about 0.5x. While this may not raise any eyebrows, if the price-to-earnings ratio is not justified, investors may miss out on a potential opportunity or ignore an impending disappointment.

See our latest analysis for ELL Environmental Holdings

SEHK:1395 Price-to-sales ratio versus industry April 21, 2024

What does ELL Environmental Holdings’ recent performance look like?

For example, consider that ELL Environmental Holdings’ financial performance has been poor lately as revenues have declined. One possibility is that the price-to-earnings ratio is muted as investors think the company could still do enough to be in line with the broader industry in the near future. If not, existing shareholders may be somewhat nervous about the viability of the share price.

We don’t have analyst forecasts, but you can see how recent trends are setting the company up for the future through our free ELL Environmental Holdings earnings, revenue and cash flow report.

How is ELL Environmental Holdings’ revenue growth progressing?

To justify the price/earnings ratio, ELL Environmental Holdings would need to achieve growth comparable to the industry.

When we looked at the financials last year, we were disheartened to see that the company’s revenues were down 44%. Yet there has been an excellent overall sales increase of 92% over the past three years, despite unsatisfactory short-term performance. Although they would have preferred to keep the trend going, shareholders would certainly welcome the revenue growth in the medium term.

Comparing that to the industry, which is expected to grow just 11% over the next twelve months, the company’s momentum is stronger based on recent medium-term annualized revenue results.

With this information, we find it interesting that ELL Environmental Holdings is trading at a fairly similar P/S compared to the industry. Most investors may not be convinced that the company can maintain its recent growth rates.

What can we learn from ELL Environmental Holdings’ P/S?

The shares have risen significantly and now ELL Environmental Holdings’ price-to-earnings ratio is back within the range of the industry median. It is argued that the price-to-sales ratio is an inferior measure of value within certain sectors, but it can be a powerful indicator of business confidence.

We didn’t quite imagine ELL Environmental Holdings’ P/S to be in line with the broader industry, as revenue growth over the past three years is higher than current sector prospects. If we see strong sales with faster growth than the industry, we can only assume that potential risks could put pressure on the price-to-earnings ratio. While recent earnings trends over the past medium term suggest that the risk of a price decline is low, investors appear to see the likelihood of earnings fluctuations in the future.

That said, be warned ELL Environmental Holdings is showing two warning signs in our investment analysis, and one of them is concerning.

If strong companies that make profits interest you, then you’ll definitely want to check this out free list of interesting companies that trade at a low price/earnings (but have proven that they can grow their profits).

Valuation is complex, but we help make it simple.

Invent or ELL Environmental Holdings may be over or undervalued if you look at our comprehensive analysis, including fair value estimates, risks and cautions, dividends, insider transactions and financial health.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. We aim to provide you with targeted, long-term analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Simply Wall St has no positions in the stocks mentioned.