Hefei Urban Construction Development Co., Ltd (SZSE:002208) Shares Fly 42% But Investors Aren't Buying For Growth

The Hefei Urban Construction Development Co., Ltd (SZSE:002208) share price has done very well over the last month, posting an excellent gain of 42%. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 7.5% over the last year.

Even after such a large jump in price, Hefei Urban Construction Development's price-to-sales (or "P/S") ratio of 0.8x might still make it look like a buy right now compared to the Real Estate industry in China, where around half of the companies have P/S ratios above 1.7x and even P/S above 4x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Hefei Urban Construction Development

What Does Hefei Urban Construction Development's Recent Performance Look Like?

Hefei Urban Construction Development has been doing a good job lately as it's been growing revenue at a solid pace. Perhaps the market is expecting this acceptable revenue performance to take a dive, which has kept the P/S suppressed. 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 out of 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 Hefei Urban Construction Development's earnings, revenue and cash flow.

Is There Any Revenue Growth Forecasted For Hefei Urban Construction Development?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Hefei Urban Construction Development's to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 10% last year. Still, lamentably revenue has fallen 20% in aggregate from three years ago, which is disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 11% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's understandable that Hefei Urban Construction Development's P/S would sit below the majority of other companies. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

What Does Hefei Urban Construction Development's P/S Mean For Investors?

The latest share price surge wasn't enough to lift Hefei Urban Construction Development's P/S close to the industry median. 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.

It's no surprise that Hefei Urban Construction Development maintains its low P/S off the back of its sliding revenue over the medium-term. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Having said that, be aware Hefei Urban Construction Development is showing 5 warning signs in our investment analysis, and 3 of those are a bit unpleasant.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.