Houpu Clean Energy Group Co., Ltd.'s (SZSE:300471) 43% Share Price Surge Not Quite Adding Up

Despite an already strong run, Houpu Clean Energy Group Co., Ltd. (SZSE:300471) shares have been powering on, with a gain of 43% in the last thirty days. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 9.4% over the last year.

Following the firm bounce in price, you could be forgiven for thinking Houpu Clean Energy Group is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 6.8x, considering almost half the companies in China's Energy Services industry have P/S ratios below 2.4x. 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 Houpu Clean Energy Group

What Does Houpu Clean Energy Group's P/S Mean For Shareholders?

For example, consider that Houpu Clean Energy Group's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

Is There Enough Revenue Growth Forecasted For Houpu Clean Energy Group?

The only time you'd be truly comfortable seeing a P/S as steep as Houpu Clean Energy Group's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered a frustrating 12% decrease to the company's top line. This has erased any of its gains during the last three years, with practically no change in revenue being achieved in total. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 21% shows it's noticeably less attractive.

With this in mind, we find it worrying that Houpu Clean Energy Group's P/S exceeds that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Bottom Line On Houpu Clean Energy Group's P/S

Houpu Clean Energy Group's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

Our examination of Houpu Clean Energy Group revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. 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.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Houpu Clean Energy Group that you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.