Huawen Media Group's (SZSE:000793) 60% Share Price Surge Not Quite Adding Up

Huawen Media Group (SZSE:000793) shares have had a really impressive month, gaining 60% after a shaky period beforehand. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 9.8% in the last twelve months.

Following the firm bounce in price, when almost half of the companies in China's Media industry have price-to-sales ratios (or "P/S") below 2.7x, you may consider Huawen Media Group as a stock not worth researching with its 8.6x 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 so lofty.

Check out our latest analysis for Huawen Media Group

How Has Huawen Media Group Performed Recently?

For instance, Huawen Media Group's receding revenue in recent times would have to be some food for thought. 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. If not, then existing shareholders may be quite nervous about the viability of the share price.

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 Huawen Media Group's earnings, revenue and cash flow.

How Is Huawen Media Group's Revenue Growth Trending?

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

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 9.6%. This means it has also seen a slide in revenue over the longer-term as revenue is down 77% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 13% shows it's an unpleasant look.

With this information, we find it concerning that Huawen Media Group is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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.

What We Can Learn From Huawen Media Group's P/S?

The strong share price surge has lead to Huawen Media Group's P/S soaring as well. 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 Huawen Media Group revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely 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.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Huawen Media Group that you should be aware of.

If these risks are making you reconsider your opinion on Huawen Media Group, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.