ChengDu Hi-Tech Development Co., Ltd.'s (SZSE:000628) Business Is Yet to Catch Up With Its Share Price

It's not a stretch to say that ChengDu Hi-Tech Development Co., Ltd.'s (SZSE:000628) price-to-sales (or "P/S") ratio of 2.5x right now seems quite "middle-of-the-road" for companies in the Real Estate industry in China, where the median P/S ratio is around 2.2x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

Check out our latest analysis for ChengDu Hi-Tech Development

How ChengDu Hi-Tech Development Has Been Performing

The revenue growth achieved at ChengDu Hi-Tech Development over the last year would be more than acceptable for most companies. Perhaps the market is expecting future revenue performance to only keep up with the broader industry, which has keeping the P/S in line with expectations. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

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 ChengDu Hi-Tech Development's earnings, revenue and cash flow.

Is There Some Revenue Growth Forecasted For ChengDu Hi-Tech Development?

In order to justify its P/S ratio, ChengDu Hi-Tech Development would need to produce growth that's similar to the industry.

Taking a look back first, we see that the company grew revenue by an impressive 17% last year. Revenue has also lifted 21% in aggregate from three years ago, mostly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 11% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's curious that ChengDu Hi-Tech Development's P/S sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What We Can Learn From ChengDu Hi-Tech Development's P/S?

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of ChengDu Hi-Tech Development revealed its poor three-year revenue trends aren't resulting in a lower P/S as per our expectations, given they look worse than current industry outlook. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. Unless the recent medium-term conditions improve, it's hard to accept the current share price as fair value.

It is also worth noting that we have found 2 warning signs for ChengDu Hi-Tech Development (1 makes us a bit uncomfortable!) that you need to take into consideration.

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.