There's Reason For Concern Over Shanghai HYP-ARCH Architectural Design Consultant Co.,Ltd.'s (SZSE:301024) Massive 28% Price Jump

Shanghai HYP-ARCH Architectural Design Consultant Co.,Ltd. (SZSE:301024) shares have had a really impressive month, gaining 28% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 23% in the last twelve months.

After such a large jump in price, when almost half of the companies in China's Professional Services industry have price-to-sales ratios (or "P/S") below 2.5x, you may consider Shanghai HYP-ARCH Architectural Design ConsultantLtd as a stock not worth researching with its 12.1x P/S ratio. 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 Shanghai HYP-ARCH Architectural Design ConsultantLtd

How Shanghai HYP-ARCH Architectural Design ConsultantLtd Has Been Performing

For example, consider that Shanghai HYP-ARCH Architectural Design ConsultantLtd's financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. If not, then existing shareholders may be quite nervous about the viability of the share price.

Although there are no analyst estimates available for Shanghai HYP-ARCH Architectural Design ConsultantLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Shanghai HYP-ARCH Architectural Design ConsultantLtd?

Shanghai HYP-ARCH Architectural Design ConsultantLtd's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 4.7%. This means it has also seen a slide in revenue over the longer-term as revenue is down 59% 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 41% shows it's an unpleasant look.

With this information, we find it concerning that Shanghai HYP-ARCH Architectural Design ConsultantLtd is trading at a P/S higher than the industry. It seems most investors are ignoring the recent poor growth rate 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.

The Key Takeaway

The strong share price surge has lead to Shanghai HYP-ARCH Architectural Design ConsultantLtd's P/S soaring as well. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Shanghai HYP-ARCH Architectural Design ConsultantLtd 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. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. 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.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Shanghai HYP-ARCH Architectural Design ConsultantLtd (1 shouldn't be ignored!) that you should be aware of before investing here.

If these risks are making you reconsider your opinion on Shanghai HYP-ARCH Architectural Design ConsultantLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com