Hygon Information Technology Co., Ltd.'s (SHSE:688041) Shares Climb 25% But Its Business Is Yet to Catch Up

Hygon Information Technology Co., Ltd. (SHSE:688041) shares have continued their recent momentum with a 25% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 90%.

Since its price has surged higher, Hygon Information Technology may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 36.6x, when you consider almost half of the companies in the Semiconductor industry in China have P/S ratios under 6.9x and even P/S lower than 3x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for Hygon Information Technology

What Does Hygon Information Technology's P/S Mean For Shareholders?

Hygon Information Technology certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. If not, then existing shareholders might be a little nervous about the viability of the share price.

Keen to find out how analysts think Hygon Information Technology's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Revenue Growth Forecasted For Hygon Information Technology?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Hygon Information Technology's to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 56% last year. Pleasingly, revenue has also lifted 255% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Looking ahead now, revenue is anticipated to climb by 35% during the coming year according to the analysts following the company. That's shaping up to be materially lower than the 41% growth forecast for the broader industry.

With this information, we find it concerning that Hygon Information Technology is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What Does Hygon Information Technology's P/S Mean For Investors?

Shares in Hygon Information Technology have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

We've concluded that Hygon Information Technology currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. At these price levels, investors should remain cautious, particularly if things don't improve.

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

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.