Hubei Guochuang Hi-tech Material Co.,Ltd's (SZSE:002377) Shares Climb 47% But Its Business Is Yet to Catch Up

Hubei Guochuang Hi-tech Material Co.,Ltd (SZSE:002377) shareholders have had their patience rewarded with a 47% share price jump in the last month. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

After such a large jump in price, given around half the companies in China's Real Estate industry have price-to-sales ratios (or "P/S") below 1.9x, you may consider Hubei Guochuang Hi-tech MaterialLtd as a stock to avoid entirely with its 4.4x 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.

See our latest analysis for Hubei Guochuang Hi-tech MaterialLtd

What Does Hubei Guochuang Hi-tech MaterialLtd's Recent Performance Look Like?

For instance, Hubei Guochuang Hi-tech MaterialLtd's receding revenue in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Hubei Guochuang Hi-tech MaterialLtd will help you shine a light on its historical performance.

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

The only time you'd be truly comfortable seeing a P/S as steep as Hubei Guochuang Hi-tech MaterialLtd's is when the company's growth is on track to outshine the industry decidedly.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 69%. The last three years don't look nice either as the company has shrunk revenue by 89% in aggregate. 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 10% shows it's an unpleasant look.

With this in mind, we find it worrying that Hubei Guochuang Hi-tech MaterialLtd's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What Does Hubei Guochuang Hi-tech MaterialLtd's P/S Mean For Investors?

The strong share price surge has lead to Hubei Guochuang Hi-tech MaterialLtd's P/S soaring as well. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Hubei Guochuang Hi-tech MaterialLtd 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. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Before you take the next step, you should know about the 1 warning sign for Hubei Guochuang Hi-tech MaterialLtd that we have uncovered.

If you're unsure about the strength of Hubei Guochuang Hi-tech MaterialLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.