HuiZhou Intelligence Technology Group Co., Ltd (SZSE:002122) Stock Rockets 28% As Investors Are Less Pessimistic Than Expected

Despite an already strong run, HuiZhou Intelligence Technology Group Co., Ltd (SZSE:002122) shares have been powering on, with a gain of 28% in the last thirty days. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 6.4% over the last year.

After such a large jump in price, you could be forgiven for thinking HuiZhou Intelligence Technology Group is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 9.1x, considering almost half the companies in China's Machinery industry have P/S ratios below 3.3x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for HuiZhou Intelligence Technology Group

How HuiZhou Intelligence Technology Group Has Been Performing

The revenue growth achieved at HuiZhou Intelligence Technology Group over the last year would be more than acceptable for most companies. It might be that many expect the respectable 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.

Although there are no analyst estimates available for HuiZhou Intelligence Technology Group, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, HuiZhou Intelligence Technology Group would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered an exceptional 15% gain to the company's top line. The latest three year period has also seen a 14% overall rise in revenue, aided extensively by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 24% shows it's noticeably less attractive.

In light of this, it's alarming that HuiZhou Intelligence Technology Group's P/S sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. 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 Bottom Line On HuiZhou Intelligence Technology Group's P/S

The strong share price surge has lead to HuiZhou Intelligence Technology Group's P/S soaring as well. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

The fact that HuiZhou Intelligence Technology Group 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. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

And what about other risks? Every company has them, and we've spotted 2 warning signs for HuiZhou Intelligence Technology Group you should know about.

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).

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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.