Guangzhou Haozhi Industrial Co.,Ltd.'s (SZSE:300503) 37% Price Boost Is Out Of Tune With Revenues

Despite an already strong run, Guangzhou Haozhi Industrial Co.,Ltd. (SZSE:300503) shares have been powering on, with a gain of 37% in the last thirty days. Notwithstanding the latest gain, the annual share price return of 9.9% isn't as impressive.

After such a large jump in price, you could be forgiven for thinking Guangzhou Haozhi IndustrialLtd is a stock not worth researching with a price-to-sales ratios (or "P/S") of 4.7x, considering almost half the companies in China's Machinery industry have P/S ratios below 2.8x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

Check out our latest analysis for Guangzhou Haozhi IndustrialLtd

What Does Guangzhou Haozhi IndustrialLtd's Recent Performance Look Like?

Guangzhou Haozhi IndustrialLtd 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. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Guangzhou Haozhi IndustrialLtd will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For Guangzhou Haozhi IndustrialLtd?

In order to justify its P/S ratio, Guangzhou Haozhi IndustrialLtd would need to produce impressive growth in excess of the industry.

Taking a look back first, we see that the company grew revenue by an impressive 23% last year. The latest three year period has also seen a 11% overall rise in revenue, aided extensively by its short-term performance. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

This is in contrast to the rest of the industry, which is expected to grow by 23% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in mind, we find it worrying that Guangzhou Haozhi IndustrialLtd's P/S exceeds that of its industry peers. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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

Guangzhou Haozhi IndustrialLtd shares have taken a big step in a northerly direction, but its P/S is elevated as a result. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Guangzhou Haozhi IndustrialLtd revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Guangzhou Haozhi IndustrialLtd (at least 2 which can't be ignored), and understanding these should be part of your investment process.

If these risks are making you reconsider your opinion on Guangzhou Haozhi IndustrialLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.