What GuangZhou Wahlap Technology Corporation Limited's (SZSE:301011) 47% Share Price Gain Is Not Telling You

Despite an already strong run, GuangZhou Wahlap Technology Corporation Limited (SZSE:301011) shares have been powering on, with a gain of 47% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 45% in the last year.

After such a large jump in price, you could be forgiven for thinking GuangZhou Wahlap Technology is a stock not worth researching with a price-to-sales ratios (or "P/S") of 4.6x, considering almost half the companies in China's Leisure industry have P/S ratios below 3.3x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

View our latest analysis for GuangZhou Wahlap Technology

How GuangZhou Wahlap Technology Has Been Performing

Recent times have been quite advantageous for GuangZhou Wahlap Technology as its revenue has been rising very briskly. It seems that many are expecting the strong revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Is There Enough Revenue Growth Forecasted For GuangZhou Wahlap Technology?

In order to justify its P/S ratio, GuangZhou Wahlap Technology would need to produce impressive growth in excess of the industry.

Retrospectively, the last year delivered an exceptional 32% gain to the company's top line. Pleasingly, revenue has also lifted 68% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 22% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that GuangZhou Wahlap Technology is trading at a P/S higher than the industry. It seems most investors are ignoring the fairly limited recent growth rates 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 Final Word

GuangZhou Wahlap Technology's P/S is on the rise since its shares have risen strongly. 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 GuangZhou Wahlap Technology currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Plus, you should also learn about these 3 warning signs we've spotted with GuangZhou Wahlap Technology (including 2 which don't sit too well with us).

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.