Stock Analysis
Hongbaoli Group Corporation, Ltd.'s (SZSE:002165) Share Price Boosted 36% But Its Business Prospects Need A Lift Too
The Hongbaoli Group Corporation, Ltd. (SZSE:002165) share price has done very well over the last month, posting an excellent gain of 36%. Taking a wider view, although not as strong as the last month, the full year gain of 14% is also fairly reasonable.
Even after such a large jump in price, Hongbaoli Group Corporation may still be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 1.3x, since almost half of all companies in the Chemicals industry in China have P/S ratios greater than 2.4x and even P/S higher than 5x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.
View our latest analysis for Hongbaoli Group Corporation
How Hongbaoli Group Corporation Has Been Performing
Revenue has risen firmly for Hongbaoli Group Corporation recently, which is pleasing to see. It might be that many expect the respectable revenue performance to degrade substantially, which has repressed the P/S. Those who are bullish on Hongbaoli Group Corporation 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 Hongbaoli Group Corporation's earnings, revenue and cash flow.Is There Any Revenue Growth Forecasted For Hongbaoli Group Corporation?
The only time you'd be truly comfortable seeing a P/S as low as Hongbaoli Group Corporation's is when the company's growth is on track to lag the industry.
Retrospectively, the last year delivered a decent 8.3% gain to the company's revenues. Still, lamentably revenue has fallen 25% in aggregate from three years ago, which is disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.
In contrast to the company, the rest of the industry is expected to grow by 25% over the next year, which really puts the company's recent medium-term revenue decline into perspective.
In light of this, it's understandable that Hongbaoli Group Corporation's P/S would sit below the majority of other companies. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.
What Does Hongbaoli Group Corporation's P/S Mean For Investors?
The latest share price surge wasn't enough to lift Hongbaoli Group Corporation's P/S close to the industry median. 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.
As we suspected, our examination of Hongbaoli Group Corporation revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.
You should always think about risks. Case in point, we've spotted 4 warning signs for Hongbaoli Group Corporation you should be aware of, and 2 of them shouldn't be ignored.
If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
Valuation is complex, but we're here to simplify it.
Discover if Hongbaoli Group Corporation might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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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.
About SZSE:002165
Hongbaoli Group Corporation
Researches, develops, produces, and markets polyol and isopropanolamine series of products in China.