Subdued Growth No Barrier To HCR Co., Ltd's (SHSE:688500) Price

HCR Co., Ltd's (SHSE:688500) price-to-sales (or "P/S") ratio of 4.4x may not look like an appealing investment opportunity when you consider close to half the companies in the Professional Services industry in China have P/S ratios below 2.9x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for HCR

How HCR Has Been Performing

Revenue has risen at a steady rate over the last year for HCR, which is generally not a bad outcome. It might be that many expect the reasonable 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 HCR, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is HCR's Revenue Growth Trending?

In order to justify its P/S ratio, HCR would need to produce impressive growth in excess of the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 5.3%. Pleasingly, revenue has also lifted 39% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

This is in contrast to the rest of the industry, which is expected to grow by 91% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that HCR is trading at a P/S higher than the industry. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What Does HCR's P/S Mean For Investors?

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.

The fact that HCR currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. 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 there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Plus, you should also learn about this 1 warning sign we've spotted with HCR.

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.