Optimistic Investors Push Hangzhou Zhongheng Electric Co., Ltd (SZSE:002364) Shares Up 36% But Growth Is Lacking

Despite an already strong run, Hangzhou Zhongheng Electric Co., Ltd (SZSE:002364) shares have been powering on, with a gain of 36% in the last thirty days. The last 30 days bring the annual gain to a very sharp 35%.

After such a large jump in price, you could be forgiven for thinking Hangzhou Zhongheng Electric is a stock not worth researching with a price-to-sales ratios (or "P/S") of 3.1x, considering almost half the companies in China's Electrical industry have P/S ratios below 2.4x. 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 Hangzhou Zhongheng Electric

How Has Hangzhou Zhongheng Electric Performed Recently?

Revenue has risen firmly for Hangzhou Zhongheng Electric recently, which is pleasing to see. 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. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

How Is Hangzhou Zhongheng Electric's Revenue Growth Trending?

Hangzhou Zhongheng Electric's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 12%. However, due to its less than impressive performance prior to this period, revenue growth is practically non-existent over the last three years overall. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 25% shows it's noticeably less attractive.

In light of this, it's alarming that Hangzhou Zhongheng Electric'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. 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.

The Key Takeaway

The large bounce in Hangzhou Zhongheng Electric's shares has lifted the company's P/S handsomely. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

The fact that Hangzhou Zhongheng Electric 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.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Hangzhou Zhongheng Electric (1 is a bit concerning!) that you should be aware of before investing here.

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.