There's Reason For Concern Over HL Corp (Shenzhen)'s (SZSE:002105) Massive 57% Price Jump

Despite an already strong run, HL Corp (Shenzhen) (SZSE:002105) shares have been powering on, with a gain of 57% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 67% in the last year.

Although its price has surged higher, there still wouldn't be many who think HL Corp (Shenzhen)'s price-to-sales (or "P/S") ratio of 3x is worth a mention when the median P/S in China's Leisure industry is similar at about 3.5x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Check out our latest analysis for HL Corp (Shenzhen)

How Has HL Corp (Shenzhen) Performed Recently?

For instance, HL Corp (Shenzhen)'s receding revenue in recent times would have to be some food for thought. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

Although there are no analyst estimates available for HL Corp (Shenzhen), 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 P/S?

The only time you'd be comfortable seeing a P/S like HL Corp (Shenzhen)'s is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered a frustrating 4.7% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 57% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 22% shows it's an unpleasant look.

With this in mind, we find it worrying that HL Corp (Shenzhen)'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 on the share price eventually.

The Final Word

HL Corp (Shenzhen) appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

The fact that HL Corp (Shenzhen) currently trades at a P/S on par with the rest of the industry is surprising to us since its recent revenues have been in decline over the medium-term, all while the industry is set to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

We don't want to rain on the parade too much, but we did also find 4 warning signs for HL Corp (Shenzhen) (2 are a bit concerning!) that you need to be mindful of.

If these risks are making you reconsider your opinion on HL Corp (Shenzhen), 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.