Sichuan Huafeng Technology Co., LTD. (SHSE:688629) Stocks Pounded By 27% But Not Lagging Industry On Growth Or Pricing

Sichuan Huafeng Technology Co., LTD. (SHSE:688629) shares have retraced a considerable 27% in the last month, reversing a fair amount of their solid recent performance. Still, a bad month hasn't completely ruined the past year with the stock gaining 87%, which is great even in a bull market.

Although its price has dipped substantially, when almost half of the companies in China's Electrical industry have price-to-sales ratios (or "P/S") below 2.5x, you may still consider Sichuan Huafeng Technology as a stock not worth researching with its 20.9x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

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See our latest analysis for Sichuan Huafeng Technology

How Sichuan Huafeng Technology Has Been Performing

With revenue growth that's superior to most other companies of late, Sichuan Huafeng Technology has been doing relatively well. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Sichuan Huafeng Technology.

Is There Enough Revenue Growth Forecasted For Sichuan Huafeng Technology?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Sichuan Huafeng Technology's to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 21%. Pleasingly, revenue has also lifted 31% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next year should generate growth of 129% as estimated by the one analyst watching the company. With the industry only predicted to deliver 27%, the company is positioned for a stronger revenue result.

With this information, we can see why Sichuan Huafeng Technology is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Sichuan Huafeng Technology's P/S?

Even after such a strong price drop, Sichuan Huafeng Technology's P/S still exceeds the industry median significantly. 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.

We've established that Sichuan Huafeng Technology maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Electrical industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Before you take the next step, you should know about the 1 warning sign for Sichuan Huafeng Technology that we have uncovered.

If you're unsure about the strength of Sichuan Huafeng Technology'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.