Optimistic Investors Push Shandong Hontron Aluminum Industry Holding Company Limited (SZSE:002379) Shares Up 25% But Growth Is Lacking

Despite an already strong run, Shandong Hontron Aluminum Industry Holding Company Limited (SZSE:002379) shares have been powering on, with a gain of 25% in the last thirty days. The last month tops off a massive increase of 106% in the last year.

Since its price has surged higher, given close to half the companies operating in China's Metals and Mining industry have price-to-sales ratios (or "P/S") below 1.4x, you may consider Shandong Hontron Aluminum Industry Holding as a stock to potentially avoid with its 3.1x P/S ratio. 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 Hontron Aluminum Industry Holding

How Has Shandong Hontron Aluminum Industry Holding Performed Recently?

The revenue growth achieved at Shandong Hontron Aluminum Industry Holding 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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 Hontron Aluminum Industry Holding's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Shandong Hontron Aluminum Industry Holding?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Shandong Hontron Aluminum Industry Holding's to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 20% last year. Revenue has also lifted 9.3% in aggregate from three years ago, mostly 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.

This is in contrast to the rest of the industry, which is expected to grow by 14% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in mind, we find it worrying that Shandong Hontron Aluminum Industry Holding's P/S exceeds that of its industry peers. 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 Hontron Aluminum Industry Holding's P/S Mean For Investors?

Shandong Hontron Aluminum Industry Holding 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.

Our examination of Shandong Hontron Aluminum Industry Holding revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. 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. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

You always need to take note of risks, for example - Shandong Hontron Aluminum Industry Holding has 1 warning sign we think you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.