Revenues Not Telling The Story For Qingdao Hi-Tech Moulds & Plastics Technology Co., Ltd. (SZSE:301022) After Shares Rise 58%

Qingdao Hi-Tech Moulds & Plastics Technology Co., Ltd. (SZSE:301022) shareholders would be excited to see that the share price has had a great month, posting a 58% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 47% in the last year.

After such a large jump in price, you could be forgiven for thinking Qingdao Hi-Tech Moulds & Plastics Technology is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 5.2x, considering almost half the companies in China's Auto Components industry have P/S ratios below 2.4x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Qingdao Hi-Tech Moulds & Plastics Technology

What Does Qingdao Hi-Tech Moulds & Plastics Technology's P/S Mean For Shareholders?

Revenue has risen firmly for Qingdao Hi-Tech Moulds & Plastics Technology recently, which is pleasing to see. 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. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Qingdao Hi-Tech Moulds & Plastics Technology will help you shine a light on its historical performance.

How Is Qingdao Hi-Tech Moulds & Plastics Technology's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Qingdao Hi-Tech Moulds & Plastics Technology's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered a decent 7.8% gain to the company's revenues. The latest three year period has also seen a 21% overall rise in revenue, aided somewhat by its short-term performance. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Comparing that to the industry, which is predicted to deliver 22% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this information, we find it concerning that Qingdao Hi-Tech Moulds & Plastics Technology is trading at a P/S higher than the industry. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Key Takeaway

Shares in Qingdao Hi-Tech Moulds & Plastics Technology have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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 Qingdao Hi-Tech Moulds & Plastics Technology revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

You should always think about risks. Case in point, we've spotted 4 warning signs for Qingdao Hi-Tech Moulds & Plastics Technology you should be aware of, and 2 of them shouldn't be ignored.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.