There's Reason For Concern Over Guangdong Huafeng New Energy Technology Co.,Ltd.'s (SZSE:002806) Massive 36% Price Jump

Guangdong Huafeng New Energy Technology Co.,Ltd. (SZSE:002806) shareholders are no doubt pleased to see that the share price has bounced 36% in the last month, although it is still struggling to make up recently lost ground. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 33% in the last twelve months.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Guangdong Huafeng New Energy TechnologyLtd's P/S ratio of 2.3x, since the median price-to-sales (or "P/S") ratio for the Electrical industry in China is also close to 2.1x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Check out our latest analysis for Guangdong Huafeng New Energy TechnologyLtd

What Does Guangdong Huafeng New Energy TechnologyLtd's P/S Mean For Shareholders?

The recent revenue growth at Guangdong Huafeng New Energy TechnologyLtd would have to be considered satisfactory if not spectacular. Perhaps the expectation moving forward is that the revenue growth will track in line with the wider industry for the near term, which has kept the P/S subdued. Those who are bullish on Guangdong Huafeng New Energy TechnologyLtd will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Guangdong Huafeng New Energy TechnologyLtd will help you shine a light on its historical performance.

Is There Some Revenue Growth Forecasted For Guangdong Huafeng New Energy TechnologyLtd?

In order to justify its P/S ratio, Guangdong Huafeng New Energy TechnologyLtd would need to produce growth that's similar to the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 2.7% last year. The latest three year period has also seen a 19% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 26% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it interesting that Guangdong Huafeng New Energy TechnologyLtd is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What We Can Learn From Guangdong Huafeng New Energy TechnologyLtd's P/S?

Guangdong Huafeng New Energy TechnologyLtd appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry 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.

Our examination of Guangdong Huafeng New Energy TechnologyLtd revealed its poor three-year revenue trends aren't resulting in a lower P/S as per our expectations, given they look worse than current industry outlook. Right now we are uncomfortable with the P/S as this revenue performance isn't likely to support a more 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.

Before you take the next step, you should know about the 3 warning signs for Guangdong Huafeng New Energy TechnologyLtd (2 make us uncomfortable!) that we have uncovered.

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.