Hangzhou Wensli Silk Culture Co., Ltd. (SZSE:301066) Stock Rockets 65% As Investors Are Less Pessimistic Than Expected

Despite an already strong run, Hangzhou Wensli Silk Culture Co., Ltd. (SZSE:301066) shares have been powering on, with a gain of 65% in the last thirty days. The last 30 days bring the annual gain to a very sharp 32%.

Since its price has surged higher, given around half the companies in China's Luxury industry have price-to-sales ratios (or "P/S") below 1.8x, you may consider Hangzhou Wensli Silk Culture as a stock to avoid entirely with its 4.7x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

See our latest analysis for Hangzhou Wensli Silk Culture

What Does Hangzhou Wensli Silk Culture's Recent Performance Look Like?

The revenue growth achieved at Hangzhou Wensli Silk Culture over the last year would be more than acceptable for most companies. 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. If not, then existing shareholders may be a little nervous about the viability of the share price.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Hangzhou Wensli Silk Culture's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Hangzhou Wensli Silk Culture?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Hangzhou Wensli Silk Culture's to be considered reasonable.

Retrospectively, the last year delivered a decent 7.8% gain to the company's revenues. Still, lamentably revenue has fallen 3.2% in aggregate from three years ago, which is disappointing. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 14% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we find it worrying that Hangzhou Wensli Silk Culture's P/S exceeds that of its industry peers. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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.

The Final Word

The strong share price surge has lead to Hangzhou Wensli Silk Culture's P/S soaring as well. 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.

We've established that Hangzhou Wensli Silk Culture 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.

You should always think about risks. Case in point, we've spotted 3 warning signs for Hangzhou Wensli Silk Culture you should be aware of.

If these risks are making you reconsider your opinion on Hangzhou Wensli Silk Culture, 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.