Jiangxi Hengda Hi-Tech Co.,Ltd. (SZSE:002591) Stock Rockets 31% As Investors Are Less Pessimistic Than Expected

Jiangxi Hengda Hi-Tech Co.,Ltd. (SZSE:002591) shareholders are no doubt pleased to see that the share price has bounced 31% in the last month, although it is still struggling to make up recently lost ground. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 34% in the last twelve months.

Since its price has surged higher, when almost half of the companies in China's Chemicals industry have price-to-sales ratios (or "P/S") below 1.9x, you may consider Jiangxi Hengda Hi-TechLtd as a stock probably not worth researching with its 3.8x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Jiangxi Hengda Hi-TechLtd

How Has Jiangxi Hengda Hi-TechLtd Performed Recently?

Revenue has risen firmly for Jiangxi Hengda Hi-TechLtd recently, which is pleasing to see. Perhaps the market is expecting this decent revenue performance to beat out the industry over the near term, which has kept the P/S propped up. However, if this isn't the case, investors might get caught out paying too much for the stock.

Although there are no analyst estimates available for Jiangxi Hengda Hi-TechLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Jiangxi Hengda Hi-TechLtd's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as high as Jiangxi Hengda Hi-TechLtd'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 8.1% last year. The solid recent performance means it was also able to grow revenue by 19% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 25% shows it's noticeably less attractive.

With this in mind, we find it worrying that Jiangxi Hengda Hi-TechLtd'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. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

The large bounce in Jiangxi Hengda Hi-TechLtd'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 Jiangxi Hengda Hi-TechLtd 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. 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.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Jiangxi Hengda Hi-TechLtd that 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.