Hubei Century Network Technology Inc. (SZSE:300494) Soars 27% But It's A Story Of Risk Vs Reward

Hubei Century Network Technology Inc. (SZSE:300494) shares have had a really impressive month, gaining 27% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 18% over that time.

Even after such a large jump in price, it's still not a stretch to say that Hubei Century Network Technology's price-to-sales (or "P/S") ratio of 5.5x right now seems quite "middle-of-the-road" compared to the Interactive Media and Services industry in China, seeing as it matches the P/S ratio of the wider industry. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

See our latest analysis for Hubei Century Network Technology

What Does Hubei Century Network Technology's P/S Mean For Shareholders?

Hubei Century Network Technology has been struggling lately as its revenue has declined faster than most other companies. One possibility is that the P/S is moderate because investors think the company's revenue trend will eventually fall in line with most others in the industry. You'd much rather the company improve its revenue if you still believe in the business. Or at the very least, you'd be hoping it doesn't keep underperforming if your plan is to pick up some stock while it's not in favour.

Keen to find out how analysts think Hubei Century Network Technology's future stacks up against the industry? In that case, our free report is a great place to start.

Do Revenue Forecasts Match The P/S Ratio?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Hubei Century Network Technology's to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 39%. As a result, revenue from three years ago have also fallen 1.2% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 70% as estimated by the two analysts watching the company. That's shaping up to be materially higher than the 9.5% growth forecast for the broader industry.

With this in consideration, we find it intriguing that Hubei Century Network Technology's P/S is closely matching its industry peers. It may be that most investors aren't convinced the company can achieve future growth expectations.

The Final Word

Hubei Century Network Technology appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry 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.

Despite enticing revenue growth figures that outpace the industry, Hubei Century Network Technology's P/S isn't quite what we'd expect. Perhaps uncertainty in the revenue forecasts are what's keeping the P/S ratio consistent with the rest of the industry. It appears some are indeed anticipating revenue instability, because these conditions should normally provide a boost to the share price.

Plus, you should also learn about these 3 warning signs we've spotted with Hubei Century Network Technology.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.