There's Reason For Concern Over Hangzhou Huning Elevator Parts Co., Ltd.'s (SZSE:300669) Massive 38% Price Jump

The Hangzhou Huning Elevator Parts Co., Ltd. (SZSE:300669) share price has done very well over the last month, posting an excellent gain of 38%. Looking back a bit further, it's encouraging to see the stock is up 27% in the last year.

Since its price has surged higher, you could be forgiven for thinking Hangzhou Huning Elevator Parts is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 10.2x, considering almost half the companies in China's Machinery industry have P/S ratios below 2.8x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Hangzhou Huning Elevator Parts

What Does Hangzhou Huning Elevator Parts' P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Hangzhou Huning Elevator Parts over the last year, which is not ideal at all. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

Although there are no analyst estimates available for Hangzhou Huning Elevator Parts, 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?

The only time you'd be truly comfortable seeing a P/S as steep as Hangzhou Huning Elevator Parts' is when the company's growth is on track to outshine the industry decidedly.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 15%. This means it has also seen a slide in revenue over the longer-term as revenue is down 12% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

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

With this information, we find it concerning that Hangzhou Huning Elevator Parts is trading at a P/S higher than the industry. 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 very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Final Word

Hangzhou Huning Elevator Parts' P/S has grown nicely over the last month thanks to a handy boost in the share price. 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 Hangzhou Huning Elevator Parts revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. 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.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Hangzhou Huning Elevator Parts (1 is significant!) that you need to be mindful of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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.