Subdued Growth No Barrier To Sichuan Huati Lighting Technology Co.,Ltd. (SHSE:603679) With Shares Advancing 43%

Those holding Sichuan Huati Lighting Technology Co.,Ltd. (SHSE:603679) shares would be relieved that the share price has rebounded 43% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 18% over that time.

Since its price has surged higher, when almost half of the companies in China's Electrical industry have price-to-sales ratios (or "P/S") below 2.1x, you may consider Sichuan Huati Lighting TechnologyLtd as a stock probably not worth researching with its 2.8x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

Check out our latest analysis for Sichuan Huati Lighting TechnologyLtd

How Sichuan Huati Lighting TechnologyLtd Has Been Performing

Recent times have been quite advantageous for Sichuan Huati Lighting TechnologyLtd as its revenue has been rising very briskly. It seems that many are expecting the strong revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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 Sichuan Huati Lighting TechnologyLtd's earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

Sichuan Huati Lighting TechnologyLtd's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Taking a look back first, we see that the company grew revenue by an impressive 39% last year. Still, revenue has fallen 12% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 26% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's alarming that Sichuan Huati Lighting TechnologyLtd's P/S sits above the majority of other companies. 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.

The Final Word

Sichuan Huati Lighting TechnologyLtd shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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've established that Sichuan Huati Lighting TechnologyLtd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Having said that, be aware Sichuan Huati Lighting TechnologyLtd is showing 2 warning signs in our investment analysis, and 1 of those can't be ignored.

If you're unsure about the strength of Sichuan Huati Lighting TechnologyLtd'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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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.