Ningbo Henghe Precision Industry Co.,Ltd.'s (SZSE:300539) Shares Climb 34% But Its Business Is Yet to Catch Up

The Ningbo Henghe Precision Industry Co.,Ltd. (SZSE:300539) share price has done very well over the last month, posting an excellent gain of 34%. The last 30 days bring the annual gain to a very sharp 78%.

Following the firm bounce in price, you could be forgiven for thinking Ningbo Henghe Precision IndustryLtd is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 4.8x, considering almost half the companies in China's Chemicals industry have P/S ratios below 2.4x. 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 Ningbo Henghe Precision IndustryLtd

What Does Ningbo Henghe Precision IndustryLtd's Recent Performance Look Like?

Ningbo Henghe Precision IndustryLtd has been doing a decent job lately as it's been growing revenue at a reasonable pace. It might be that many expect the reasonable 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.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Ningbo Henghe Precision IndustryLtd will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For Ningbo Henghe Precision IndustryLtd?

The only time you'd be truly comfortable seeing a P/S as steep as Ningbo Henghe Precision IndustryLtd's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered a decent 6.3% gain to the company's revenues. The latest three year period has also seen a 5.2% overall rise in revenue, aided somewhat by its short-term performance. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Comparing that to the industry, which is predicted to deliver 24% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

In light of this, it's alarming that Ningbo Henghe Precision IndustryLtd's P/S sits above the majority of other companies. 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.

The Final Word

Ningbo Henghe Precision IndustryLtd's P/S has grown nicely over the last month thanks to a handy boost in the share price. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Ningbo Henghe Precision IndustryLtd 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. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Plus, you should also learn about these 2 warning signs we've spotted with Ningbo Henghe Precision IndustryLtd (including 1 which shouldn't be ignored).

If you're unsure about the strength of Ningbo Henghe Precision IndustryLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.