Some Confidence Is Lacking In Hwa Create Corporation's (SZSE:300045) P/S

When close to half the companies in the Aerospace & Defense industry in China have price-to-sales ratios (or "P/S") below 5.5x, you may consider Hwa Create Corporation (SZSE:300045) as a stock to avoid entirely with its 12.5x 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.

View our latest analysis for Hwa Create

What Does Hwa Create's Recent Performance Look Like?

With revenue growth that's superior to most other companies of late, Hwa Create has been doing relatively well. The P/S is probably high because investors think this strong revenue performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Hwa Create will help you uncover what's on the horizon.

How Is Hwa Create's Revenue Growth Trending?

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

Retrospectively, the last year delivered an exceptional 121% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 35% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the lone analyst covering the company suggest revenue should grow by 32% over the next year. Meanwhile, the rest of the industry is forecast to expand by 38%, which is noticeably more attractive.

In light of this, it's alarming that Hwa Create's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We've concluded that Hwa Create currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 1 warning sign for Hwa Create 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.