Guangdong Huicheng Vacuum Technology Co., Ltd. (SZSE:301392) Stock Rockets 39% As Investors Are Less Pessimistic Than Expected

Guangdong Huicheng Vacuum Technology Co., Ltd. (SZSE:301392) shares have had a really impressive month, gaining 39% after a shaky period beforehand. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

After such a large jump in price, you could be forgiven for thinking Guangdong Huicheng Vacuum Technology is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 15.9x, considering almost half the companies in China's Machinery industry have P/S ratios below 3.4x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Guangdong Huicheng Vacuum Technology

How Guangdong Huicheng Vacuum Technology Has Been Performing

Guangdong Huicheng Vacuum Technology certainly has been doing a good job lately as it's been growing revenue more than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. However, if this isn't the case, investors might get caught out paying too much for the stock.

Keen to find out how analysts think Guangdong Huicheng Vacuum Technology's future stacks up against the industry? In that case, our free report is a great place to start.

What Are Revenue Growth Metrics Telling Us About The High P/S?

In order to justify its P/S ratio, Guangdong Huicheng Vacuum Technology would need to produce outstanding growth that's well in excess of the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 9.0% last year. The latest three year period has also seen a 5.7% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 19% during the coming year according to the sole analyst following the company. Meanwhile, the rest of the industry is forecast to expand by 22%, which is noticeably more attractive.

With this in consideration, we believe it doesn't make sense that Guangdong Huicheng Vacuum Technology's P/S is outpacing its industry peers. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

Guangdong Huicheng Vacuum Technology's P/S has grown nicely over the last month thanks to a handy boost in the share price. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Guangdong Huicheng Vacuum Technology, this doesn't appear to be impacting the P/S in the slightest. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Guangdong Huicheng Vacuum Technology (2 make us uncomfortable!) that you should be aware of before investing here.

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.

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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.