Hang Zhou Iron & Steel Co.,Ltd.'s (SHSE:600126) Shares Bounce 26% But Its Business Still Trails The Industry

Hang Zhou Iron & Steel Co.,Ltd. (SHSE:600126) shares have continued their recent momentum with a 26% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 41% in the last year.

In spite of the firm bounce in price, Hang Zhou Iron & SteelLtd's price-to-sales (or "P/S") ratio of 0.3x might still make it look like a buy right now compared to the Metals and Mining industry in China, where around half of the companies have P/S ratios above 1.3x and even P/S above 4x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

See our latest analysis for Hang Zhou Iron & SteelLtd

How Has Hang Zhou Iron & SteelLtd Performed Recently?

Hang Zhou Iron & SteelLtd certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. Perhaps the market is expecting future revenue performance to dwindle, which has kept the P/S suppressed. Those who are bullish on Hang Zhou Iron & SteelLtd will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

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 Hang Zhou Iron & SteelLtd's earnings, revenue and cash flow.

Is There Any Revenue Growth Forecasted For Hang Zhou Iron & SteelLtd?

The only time you'd be truly comfortable seeing a P/S as low as Hang Zhou Iron & SteelLtd's is when the company's growth is on track to lag the industry.

Retrospectively, the last year delivered an exceptional 39% gain to the company's top line. The latest three year period has also seen an excellent 32% overall rise in revenue, aided by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

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

With this in consideration, it's easy to understand why Hang Zhou Iron & SteelLtd's P/S falls short of the mark set by its industry peers. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Key Takeaway

Hang Zhou Iron & SteelLtd's stock price has surged recently, but its but its P/S still remains modest. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Hang Zhou Iron & SteelLtd confirms that the company's revenue trends over the past three-year years are a key factor in its low price-to-sales ratio, as we suspected, given they fall short of current industry expectations. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

You need to take note of risks, for example - Hang Zhou Iron & SteelLtd has 3 warning signs (and 2 which are a bit unpleasant) we think you should know about.

If you're unsure about the strength of Hang Zhou Iron & SteelLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.