Shandong Homey Aquatic Development Co.,Ltd.'s (SHSE:600467) 27% Share Price Surge Not Quite Adding Up

Shandong Homey Aquatic Development Co.,Ltd. (SHSE:600467) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 32%.

Following the firm bounce in price, 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 2.8x, considering almost half the companies in China's Food industry have P/S ratios below 1.9x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

Check out our latest analysis for Shandong Homey Aquatic DevelopmentLtd

How Has Shandong Homey Aquatic DevelopmentLtd Performed Recently?

The revenue growth achieved at Shandong Homey Aquatic DevelopmentLtd over the last year would be more than acceptable for most companies. It might be that many expect the respectable 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.

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 Shandong Homey Aquatic DevelopmentLtd's earnings, revenue and cash flow.

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

The only time you'd be truly comfortable seeing a P/S as high as Shandong Homey Aquatic DevelopmentLtd's is when the company's growth is on track to outshine the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 12% last year. Revenue has also lifted 17% in aggregate from three years ago, partly thanks to the last 12 months of growth. 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 12% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

In light of this, it's alarming that Shandong Homey Aquatic DevelopmentLtd's P/S sits above the majority of other companies. 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 Does Shandong Homey Aquatic DevelopmentLtd's P/S Mean For Investors?

The large bounce in Shandong Homey Aquatic DevelopmentLtd's shares has lifted the company's P/S handsomely. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future 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. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

Before you settle on your opinion, we've discovered 3 warning signs for Shandong Homey Aquatic DevelopmentLtd (2 make us uncomfortable!) that you should be aware of.

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.

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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.