Hefei Taihe Intelligent Technology Group Co.,Ltd.'s (SHSE:603656) 51% Share Price Surge Not Quite Adding Up

Hefei Taihe Intelligent Technology Group Co.,Ltd. (SHSE:603656) shareholders have had their patience rewarded with a 51% share price jump in the last month. Looking further back, the 16% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Since its price has surged higher, you could be forgiven for thinking Hefei Taihe Intelligent Technology GroupLtd is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 5x, considering almost half the companies in China's Machinery industry have P/S ratios below 2.8x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

Check out our latest analysis for Hefei Taihe Intelligent Technology GroupLtd

How Hefei Taihe Intelligent Technology GroupLtd Has Been Performing

Hefei Taihe Intelligent Technology GroupLtd has been doing a decent job lately as it's been growing revenue at a reasonable pace. One possibility is that the P/S ratio is high because investors think this good revenue growth will be enough to outperform the broader industry in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

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 Hefei Taihe Intelligent Technology GroupLtd's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Hefei Taihe Intelligent Technology GroupLtd?

Hefei Taihe Intelligent Technology GroupLtd's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered a decent 2.8% gain to the company's revenues. Still, revenue has barely risen at all in aggregate from three years ago, which is not ideal. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 23% shows it's noticeably less attractive.

With this in mind, we find it worrying that Hefei Taihe Intelligent Technology GroupLtd's P/S exceeds that of its industry peers. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What Does Hefei Taihe Intelligent Technology GroupLtd's P/S Mean For Investors?

The strong share price surge has lead to Hefei Taihe Intelligent Technology GroupLtd's P/S soaring as well. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

The fact that Hefei Taihe Intelligent Technology GroupLtd currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You should always think about risks. Case in point, we've spotted 3 warning signs for Hefei Taihe Intelligent Technology GroupLtd you should be aware of, and 1 of them is a bit unpleasant.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.