Subdued Growth No Barrier To Lionhead Technology Development Co.,Ltd. (SHSE:600539) With Shares Advancing 26%

Lionhead Technology Development Co.,Ltd. (SHSE:600539) shares have continued their recent momentum with a 26% gain in the last month alone. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 24% over that time.

Since its price has surged higher, when almost half of the companies in China's Basic Materials industry have price-to-sales ratios (or "P/S") below 1.3x, you may consider Lionhead Technology DevelopmentLtd as a stock probably not worth researching with its 2.5x P/S ratio. 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 Lionhead Technology DevelopmentLtd

What Does Lionhead Technology DevelopmentLtd's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Lionhead Technology DevelopmentLtd over the last year, which is not ideal at all. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. 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 Lionhead Technology DevelopmentLtd's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Lionhead Technology DevelopmentLtd?

Lionhead Technology DevelopmentLtd's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 15%. Regardless, revenue has managed to lift by a handy 21% in aggregate from three years ago, thanks to the earlier period of growth. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

It's interesting to note that the rest of the industry is similarly expected to grow by 7.4% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.

In light of this, it's curious that Lionhead Technology DevelopmentLtd's P/S sits above the majority of other companies. It seems most investors are ignoring the fairly average recent growth rates and are willing to pay up for exposure to the stock. Nevertheless, they may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Key Takeaway

Lionhead Technology DevelopmentLtd shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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 look into Lionhead Technology DevelopmentLtd has shown that it currently trades on a higher than expected P/S since its recent three-year growth is only in line with the wider industry forecast. Right now we are uncomfortable 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 risk and potential investors in danger of paying an unnecessary premium.

Before you take the next step, you should know about the 1 warning sign for Lionhead Technology DevelopmentLtd that we have uncovered.

If these risks are making you reconsider your opinion on Lionhead Technology DevelopmentLtd, 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.