Huachangda Intelligent Equipment Group Co.,Ltd.'s (SZSE:300278) 26% Share Price Surge Not Quite Adding Up

Huachangda Intelligent Equipment Group Co.,Ltd. (SZSE:300278) shares have had a really impressive month, gaining 26% after a shaky period beforehand. The annual gain comes to 129% following the latest surge, making investors sit up and take notice.

Although its price has surged higher, it's still not a stretch to say that Huachangda Intelligent Equipment GroupLtd's price-to-sales (or "P/S") ratio of 3.7x right now seems quite "middle-of-the-road" compared to the Machinery industry in China, where the median P/S ratio is around 3.4x. 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.

View our latest analysis for Huachangda Intelligent Equipment GroupLtd

What Does Huachangda Intelligent Equipment GroupLtd's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Huachangda Intelligent Equipment GroupLtd over the last year, which is not ideal at all. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

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

Is There Some Revenue Growth Forecasted For Huachangda Intelligent Equipment GroupLtd?

The only time you'd be comfortable seeing a P/S like Huachangda Intelligent Equipment GroupLtd's is when the company's growth is tracking the industry closely.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 5.6%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 56% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 22% shows it's noticeably less attractive.

In light of this, it's curious that Huachangda Intelligent Equipment GroupLtd's P/S sits in line with the majority of other companies. 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.

The Bottom Line On Huachangda Intelligent Equipment GroupLtd's P/S

Its shares have lifted substantially and now Huachangda Intelligent Equipment GroupLtd's P/S is back within range of the industry median. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Huachangda Intelligent Equipment GroupLtd 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. If recent medium-term revenue trends continue, the probability of a share price decline will become quite substantial, placing shareholders at risk.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Huachangda Intelligent Equipment GroupLtd 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.