Market Might Still Lack Some Conviction On Huafu Fashion Co., Ltd. (SZSE:002042) Even After 26% Share Price Boost

Despite an already strong run, Huafu Fashion Co., Ltd. (SZSE:002042) shares have been powering on, with a gain of 26% in the last thirty days. Notwithstanding the latest gain, the annual share price return of 6.9% isn't as impressive.

In spite of the firm bounce in price, Huafu Fashion's price-to-sales (or "P/S") ratio of 0.6x might still make it look like a buy right now compared to the Luxury industry in China, where around half of the companies have P/S ratios above 1.6x and even P/S above 4x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Huafu Fashion

How Has Huafu Fashion Performed Recently?

Huafu Fashion hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. It seems that many are expecting the poor revenue performance to persist, which has repressed the P/S ratio. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Huafu Fashion will help you uncover what's on the horizon.

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

There's an inherent assumption that a company should underperform the industry for P/S ratios like Huafu Fashion's to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 2.2%. The last three years don't look nice either as the company has shrunk revenue by 35% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 17% during the coming year according to the four analysts following the company. That's shaping up to be similar to the 15% growth forecast for the broader industry.

With this in consideration, we find it intriguing that Huafu Fashion's P/S is lagging behind its industry peers. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.

The Bottom Line On Huafu Fashion's P/S

The latest share price surge wasn't enough to lift Huafu Fashion's P/S close to the industry median. 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.

It looks to us like the P/S figures for Huafu Fashion remain low despite growth that is expected to be in line with other companies in the industry. Despite average revenue growth estimates, there could be some unobserved threats keeping the P/S low. However, if you agree with the analysts' forecasts, you may be able to pick up the stock at an attractive price.

Before you take the next step, you should know about the 2 warning signs for Huafu Fashion (1 is a bit unpleasant!) that we have uncovered.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.