Ferrotec (An Hui) Technology Development Co.,LTD's (SZSE:301297) Shares Climb 25% But Its Business Is Yet to Catch Up

Those holding Ferrotec (An Hui) Technology Development Co.,LTD (SZSE:301297) shares would be relieved that the share price has rebounded 25% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Looking back a bit further, it's encouraging to see the stock is up 28% in the last year.

Following the firm bounce in price, when almost half of the companies in China's Commercial Services industry have price-to-sales ratios (or "P/S") below 2.6x, you may consider Ferrotec (An Hui) Technology DevelopmentLTD as a stock not worth researching with its 12.7x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for Ferrotec (An Hui) Technology DevelopmentLTD

How Has Ferrotec (An Hui) Technology DevelopmentLTD Performed Recently?

As an illustration, revenue has deteriorated at Ferrotec (An Hui) Technology DevelopmentLTD over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Ferrotec (An Hui) Technology DevelopmentLTD will help you shine a light on its historical performance.

How Is Ferrotec (An Hui) Technology DevelopmentLTD's Revenue Growth Trending?

Ferrotec (An Hui) Technology DevelopmentLTD'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 1.7%. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 24% in total. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 29% shows it's noticeably less attractive.

With this information, we find it concerning that Ferrotec (An Hui) Technology DevelopmentLTD 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 Ferrotec (An Hui) Technology DevelopmentLTD's P/S Mean For Investors?

Shares in Ferrotec (An Hui) Technology DevelopmentLTD have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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 Ferrotec (An Hui) Technology DevelopmentLTD 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. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. 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.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Ferrotec (An Hui) Technology DevelopmentLTD with six simple checks.

If these risks are making you reconsider your opinion on Ferrotec (An Hui) Technology DevelopmentLTD, 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.