Harson Trading (China) Co.,Ltd.'s (SHSE:603958) 29% Price Boost Is Out Of Tune With Revenues

Harson Trading (China) Co.,Ltd. (SHSE:603958) shares have had a really impressive month, gaining 29% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 31% in the last year.

Since its price has surged higher, given close to half the companies operating in China's Luxury industry have price-to-sales ratios (or "P/S") below 1.3x, you may consider Harson Trading (China)Ltd as a stock to potentially avoid with its 2.6x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Harson Trading (China)Ltd

What Does Harson Trading (China)Ltd's Recent Performance Look Like?

Harson Trading (China)Ltd has been doing a good job lately as it's been growing revenue at a solid pace. One possibility is that the P/S ratio is high because investors think this respectable revenue growth will be enough to outperform the broader industry in the near future. 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 Harson Trading (China)Ltd, take a look at this free data-rich visualisation to see how the company stacks up on 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, Harson Trading (China)Ltd would need to produce impressive growth in excess of the industry.

Retrospectively, the last year delivered a decent 14% gain to the company's revenues. Still, lamentably revenue has fallen 7.2% in aggregate from three years ago, which is disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 16% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that Harson Trading (China)Ltd's 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. 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 Harson Trading (China)Ltd's P/S

The large bounce in Harson Trading (China)Ltd's shares has lifted the company's P/S handsomely. 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.

We've established that Harson Trading (China)Ltd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

Before you settle on your opinion, we've discovered 2 warning signs for Harson Trading (China)Ltd that you should be aware of.

If you're unsure about the strength of Harson Trading (China)Ltd's 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.

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