What Hunan Huasheng CO.,Ltd's (SHSE:600156) 28% Share Price Gain Is Not Telling You

The Hunan Huasheng CO.,Ltd (SHSE:600156) share price has done very well over the last month, posting an excellent gain of 28%. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 18% over that time.

Since its price has surged higher, you could be forgiven for thinking Hunan HuashengLtd is a stock not worth researching with a price-to-sales ratios (or "P/S") of 2.9x, considering almost half the companies in China's Luxury industry have P/S ratios below 1.3x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Hunan HuashengLtd

What Does Hunan HuashengLtd's P/S Mean For Shareholders?

For example, consider that Hunan HuashengLtd's financial performance has been poor lately as its revenue has been in decline. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Hunan HuashengLtd will help you shine a light on its historical performance.

Do Revenue Forecasts Match The High P/S Ratio?

Hunan HuashengLtd's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Retrospectively, the last year delivered a frustrating 33% decrease to the company's top line. As a result, revenue from three years ago have also fallen 43% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 14% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this information, we find it concerning that Hunan HuashengLtd 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. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What We Can Learn From Hunan HuashengLtd's P/S?

The large bounce in Hunan HuashengLtd's shares has lifted the company's P/S handsomely. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our examination of Hunan HuashengLtd 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. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

Before you take the next step, you should know about the 2 warning signs for Hunan HuashengLtd that we have uncovered.

If these risks are making you reconsider your opinion on Hunan HuashengLtd, 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.