Shandong Homey Aquatic Development Co.,Ltd.'s (SHSE:600467) 25% Price Boost Is Out Of Tune With Revenues

Despite an already strong run, Shandong Homey Aquatic Development Co.,Ltd. (SHSE:600467) shares have been powering on, with a gain of 25% in the last thirty days. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 4.4% in the last twelve months.

Since its price has surged higher, you could be forgiven for thinking Shandong Homey Aquatic DevelopmentLtd is a stock not worth researching with a price-to-sales ratios (or "P/S") of 2.4x, considering almost half the companies in China's Food industry have P/S ratios below 1.8x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

Check out our latest analysis for Shandong Homey Aquatic DevelopmentLtd

How Shandong Homey Aquatic DevelopmentLtd Has Been Performing

Revenue has risen firmly for Shandong Homey Aquatic DevelopmentLtd recently, which is pleasing to see. 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.

Although there are no analyst estimates available for Shandong Homey Aquatic DevelopmentLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Shandong Homey Aquatic DevelopmentLtd?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Shandong Homey Aquatic DevelopmentLtd's to be considered reasonable.

Retrospectively, the last year delivered a decent 12% gain to the company's revenues. The solid recent performance means it was also able to grow revenue by 17% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 16% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this information, we find it concerning that Shandong Homey Aquatic DevelopmentLtd 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. 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.

What We Can Learn From Shandong Homey Aquatic DevelopmentLtd's P/S?

Shandong Homey Aquatic DevelopmentLtd shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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.

The fact that Shandong Homey Aquatic DevelopmentLtd 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. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You should always think about risks. Case in point, we've spotted 3 warning signs for Shandong Homey Aquatic DevelopmentLtd you should be aware of, and 2 of them don't sit too well with us.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.