Optimistic Investors Push HitGen Inc. (SHSE:688222) Shares Up 51% But Growth Is Lacking

HitGen Inc. (SHSE:688222) shareholders would be excited to see that the share price has had a great month, posting a 51% gain and recovering from prior weakness. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 12% in the last twelve months.

After such a large jump in price, you could be forgiven for thinking HitGen is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 12.8x, considering almost half the companies in China's Life Sciences industry have P/S ratios below 5.1x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for HitGen

What Does HitGen's Recent Performance Look Like?

HitGen certainly has been doing a good job lately as its revenue growth has been positive while most other companies have been seeing their revenue go backwards. The P/S ratio is probably high because investors think the company will continue to navigate the broader industry headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on HitGen.

What Are Revenue Growth Metrics Telling Us About The High P/S?

HitGen's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered an exceptional 18% gain to the company's top line. Pleasingly, revenue has also lifted 32% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 20% per year as estimated by the dual analysts watching the company. That's shaping up to be similar to the 20% per annum growth forecast for the broader industry.

With this in consideration, we find it intriguing that HitGen's P/S is higher than its industry peers. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.

The Final Word

The strong share price surge has lead to HitGen'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.

Given HitGen's future revenue forecasts are in line with the wider industry, the fact that it trades at an elevated P/S is somewhat surprising. Right now we are uncomfortable with the relatively high share price as the predicted future revenues aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Having said that, be aware HitGen is showing 1 warning sign in our investment analysis, you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.