Hangzhou Landscaping Incorporated (SHSE:605303) Stock Catapults 32% Though Its Price And Business Still Lag The Industry

Hangzhou Landscaping Incorporated (SHSE:605303) shares have had a really impressive month, gaining 32% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 34%.

Even after such a large jump in price, Hangzhou Landscaping's price-to-sales (or "P/S") ratio of 2.6x might still make it look like a buy right now compared to the Commercial Services industry in China, where around half of the companies have P/S ratios above 3.5x and even P/S above 6x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

See our latest analysis for Hangzhou Landscaping

How Hangzhou Landscaping Has Been Performing

The revenue growth achieved at Hangzhou Landscaping over the last year would be more than acceptable for most companies. It might be that many expect the respectable revenue performance to degrade substantially, which has repressed the P/S. Those who are bullish on Hangzhou Landscaping will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Hangzhou Landscaping's earnings, revenue and cash flow.

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

There's an inherent assumption that a company should underperform the industry for P/S ratios like Hangzhou Landscaping's to be considered reasonable.

If we review the last year of revenue growth, the company posted a worthy increase of 11%. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 43% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 32% shows it's an unpleasant look.

In light of this, it's understandable that Hangzhou Landscaping's P/S would sit below the majority of other companies. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

The Final Word

The latest share price surge wasn't enough to lift Hangzhou Landscaping's P/S close to the industry median. 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.

It's no surprise that Hangzhou Landscaping maintains its low P/S off the back of its sliding revenue over the medium-term. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. If recent medium-term revenue trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 2 warning signs for Hangzhou Landscaping you should be aware of, and 1 of them shouldn't be ignored.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.