Chahua Modern Housewares Co., Ltd.'s (SHSE:603615) 73% Price Boost Is Out Of Tune With Revenues

Chahua Modern Housewares Co., Ltd. (SHSE:603615) shareholders would be excited to see that the share price has had a great month, posting a 73% gain and recovering from prior weakness. The last month tops off a massive increase of 146% in the last year.

Following the firm bounce in price, you could be forgiven for thinking Chahua Modern Housewares is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 7.4x, considering almost half the companies in China's Consumer Durables industry have P/S ratios below 2x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Chahua Modern Housewares

How Has Chahua Modern Housewares Performed Recently?

For example, consider that Chahua Modern Housewares' 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. 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 Chahua Modern Housewares, 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 Chahua Modern Housewares?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Chahua Modern Housewares' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 2.8% decrease to the company's top line. As a result, revenue from three years ago have also fallen 4.8% overall. 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 12% shows it's an unpleasant look.

With this in mind, we find it worrying that Chahua Modern Housewares' P/S exceeds that of its industry peers. 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 Chahua Modern Housewares' P/S?

Chahua Modern Housewares' P/S has grown nicely over the last month thanks to a handy boost in the share price. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Chahua Modern Housewares 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.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Chahua Modern Housewares (2 can't be ignored!) that you should be aware of before investing here.

If you're unsure about the strength of Chahua Modern Housewares' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.