HuiZhou Intelligence Technology Group Co., Ltd's (SZSE:002122) 38% Share Price Surge Not Quite Adding Up

HuiZhou Intelligence Technology Group Co., Ltd (SZSE:002122) shareholders have had their patience rewarded with a 38% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 45%.

Following the firm bounce in price, when almost half of the companies in China's Machinery industry have price-to-sales ratios (or "P/S") below 3.1x, you may consider HuiZhou Intelligence Technology Group as a stock not worth researching with its 10.1x 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 so lofty.

Check out our latest analysis for HuiZhou Intelligence Technology Group

How Has HuiZhou Intelligence Technology Group Performed Recently?

HuiZhou Intelligence Technology Group has been doing a good job lately as it's been growing revenue at a solid pace. 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. If not, then existing shareholders may be a little nervous about the viability of the share price.

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?

The only time you'd be truly comfortable seeing a P/S as steep as HuiZhou Intelligence Technology Group's is when the company's growth is on track to outshine the industry decidedly.

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 22% shows it's noticeably less attractive.

With this in mind, we find it worrying that HuiZhou Intelligence Technology Group's P/S exceeds that of its industry peers. 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.

What Does HuiZhou Intelligence Technology Group's P/S Mean For Investors?

HuiZhou Intelligence Technology Group's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. 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.

You need to take note of risks, for example - HuiZhou Intelligence Technology Group has 3 warning signs (and 1 which is concerning) we think you should know about.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.