There's Reason For Concern Over Shanghai HYP-ARCH Architectural Design Consultant Co.,Ltd.'s (SZSE:301024) Massive 59% Price Jump

Shanghai HYP-ARCH Architectural Design Consultant Co.,Ltd. (SZSE:301024) shareholders would be excited to see that the share price has had a great month, posting a 59% gain and recovering from prior weakness. Unfortunately, despite the strong performance over the last month, the full year gain of 6.1% isn't as attractive.

Since its price has surged higher, Shanghai HYP-ARCH Architectural Design ConsultantLtd may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 19.9x, when you consider almost half of the companies in the Professional Services industry in China have P/S ratios under 3.5x and even P/S lower than 1.5x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Check out our latest analysis for Shanghai HYP-ARCH Architectural Design ConsultantLtd

How Shanghai HYP-ARCH Architectural Design ConsultantLtd Has Been Performing

As an illustration, revenue has deteriorated at Shanghai HYP-ARCH Architectural Design ConsultantLtd over the last year, which is not ideal at all. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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 Shanghai HYP-ARCH Architectural Design ConsultantLtd's earnings, revenue and cash flow.

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

In order to justify its P/S ratio, Shanghai HYP-ARCH Architectural Design ConsultantLtd would need to produce outstanding growth that's well in excess of the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 42%. The last three years don't look nice either as the company has shrunk revenue by 72% in aggregate. 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 33% shows it's an unpleasant look.

In light of this, it's alarming that Shanghai HYP-ARCH Architectural Design ConsultantLtd's P/S sits above the majority of other companies. 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. 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 Bottom Line On Shanghai HYP-ARCH Architectural Design ConsultantLtd's P/S

The strong share price surge has lead to Shanghai HYP-ARCH Architectural Design ConsultantLtd's P/S soaring as well. 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.

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.

It is also worth noting that we have found 2 warning signs for Shanghai HYP-ARCH Architectural Design ConsultantLtd that you need to take into consideration.

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.