Hangzhou Zhongya Machinery Co., Ltd.'s (SZSE:300512) Shares Climb 27% But Its Business Is Yet to Catch Up

Hangzhou Zhongya Machinery Co., Ltd. (SZSE:300512) shares have had a really impressive month, gaining 27% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 28%.

Although its price has surged higher, there still wouldn't be many who think Hangzhou Zhongya Machinery's price-to-sales (or "P/S") ratio of 3.4x is worth a mention when the median P/S in China's Machinery industry is similar at about 3.5x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for Hangzhou Zhongya Machinery

How Has Hangzhou Zhongya Machinery Performed Recently?

Revenue has risen firmly for Hangzhou Zhongya Machinery recently, which is pleasing to see. One possibility is that the P/S is moderate because investors think this respectable revenue growth might not be enough to outperform the broader industry in the near future. If that doesn't eventuate, then existing shareholders probably aren't too pessimistic about the future direction of the share price.

Although there are no analyst estimates available for Hangzhou Zhongya Machinery, 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 Hangzhou Zhongya Machinery?

In order to justify its P/S ratio, Hangzhou Zhongya Machinery would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a decent 9.2% gain to the company's revenues. Revenue has also lifted 12% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 23% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this information, we find it interesting that Hangzhou Zhongya Machinery 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.

The Bottom Line On Hangzhou Zhongya Machinery's P/S

Hangzhou Zhongya Machinery's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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.

We've established that Hangzhou Zhongya Machinery's average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. 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.

Before you take the next step, you should know about the 5 warning signs for Hangzhou Zhongya Machinery (2 are a bit unpleasant!) that we have uncovered.

If you're unsure about the strength of Hangzhou Zhongya Machinery'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.