Hangzhou Lion Electronics Co.,Ltd's (SHSE:605358) 39% Share Price Surge Not Quite Adding Up

Hangzhou Lion Electronics Co.,Ltd (SHSE:605358) shares have had a really impressive month, gaining 39% 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 20% over that time.

Even after such a large jump in price, there still wouldn't be many who think Hangzhou Lion ElectronicsLtd's price-to-sales (or "P/S") ratio of 6.4x is worth a mention when the median P/S in China's Semiconductor industry is similar at about 6.2x. 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.

Check out our latest analysis for Hangzhou Lion ElectronicsLtd

How Hangzhou Lion ElectronicsLtd Has Been Performing

Recent times haven't been great for Hangzhou Lion ElectronicsLtd as its revenue has been rising slower than most other companies. Perhaps the market is expecting future revenue performance to lift, which has kept the P/S from declining. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

Want the full picture on analyst estimates for the company? Then our free report on Hangzhou Lion ElectronicsLtd will help you uncover what's on the horizon.

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

The only time you'd be comfortable seeing a P/S like Hangzhou Lion ElectronicsLtd's is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered a decent 4.3% gain to the company's revenues. This was backed up an excellent period prior to see revenue up by 49% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the three analysts covering the company suggest revenue should grow by 29% over the next year. That's shaping up to be materially lower than the 36% growth forecast for the broader industry.

With this in mind, we find it intriguing that Hangzhou Lion ElectronicsLtd's P/S is closely matching its industry peers. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Bottom Line On Hangzhou Lion ElectronicsLtd's P/S

Its shares have lifted substantially and now Hangzhou Lion ElectronicsLtd's P/S is back within range of the industry median. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Given that Hangzhou Lion ElectronicsLtd's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Hangzhou Lion ElectronicsLtd that you need to be mindful of.

If these risks are making you reconsider your opinion on Hangzhou Lion ElectronicsLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.