Optimistic Investors Push Guangzhou Haozhi Industrial Co.,Ltd. (SZSE:300503) Shares Up 25% But Growth Is Lacking

Guangzhou Haozhi Industrial Co.,Ltd. (SZSE:300503) shares have had a really impressive month, gaining 25% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 79% in the last year.

After such a large jump in price, you could be forgiven for thinking Guangzhou Haozhi IndustrialLtd is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 5.3x, considering almost half the companies in China's Machinery industry have P/S ratios below 3.1x. 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 Guangzhou Haozhi IndustrialLtd

What Does Guangzhou Haozhi IndustrialLtd's P/S Mean For Shareholders?

Recent times have been quite advantageous for Guangzhou Haozhi IndustrialLtd as its revenue has been rising very briskly. It seems that many are expecting the strong revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

Do Revenue Forecasts Match The High P/S Ratio?

Guangzhou Haozhi IndustrialLtd's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Taking a look back first, we see that the company grew revenue by an impressive 35% last year. Revenue has also lifted 10.0% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Comparing that to the industry, which is predicted to deliver 22% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

In light of this, it's alarming that Guangzhou Haozhi IndustrialLtd's P/S sits above the majority of other companies. 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

Shares in Guangzhou Haozhi IndustrialLtd have seen a strong upwards swing lately, which has really helped boost its P/S figure. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

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. 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 the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

Before you settle on your opinion, we've discovered 3 warning signs for Guangzhou Haozhi IndustrialLtd that you should be aware of.

If you're unsure about the strength of Guangzhou Haozhi IndustrialLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.