Subdued Growth No Barrier To Hunan Lead Power Technology Group Co., Ltd. (SZSE:300530) With Shares Advancing 45%

Hunan Lead Power Technology Group Co., Ltd. (SZSE:300530) shareholders would be excited to see that the share price has had a great month, posting a 45% gain and recovering from prior weakness. The annual gain comes to 101% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, given around half the companies in China's Chemicals industry have price-to-sales ratios (or "P/S") below 2.3x, you may consider Hunan Lead Power Technology Group as a stock to avoid entirely with its 29x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for Hunan Lead Power Technology Group

What Does Hunan Lead Power Technology Group's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Hunan Lead Power Technology Group over the last year, which is not ideal at all. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Although there are no analyst estimates available for Hunan Lead Power Technology Group, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Hunan Lead Power Technology Group's Revenue Growth Trending?

In order to justify its P/S ratio, Hunan Lead Power Technology Group would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a frustrating 50% decrease to the company's top line. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 6.5% in total. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

This is in contrast to the rest of the industry, which is expected to grow by 25% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Hunan Lead Power Technology Group is trading at a P/S higher than the industry. 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 Final Word

Hunan Lead Power Technology Group's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

The fact that Hunan Lead Power Technology Group 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. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

Having said that, be aware Hunan Lead Power Technology Group is showing 2 warning signs in our investment analysis, you should know about.

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).

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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.