There's Reason For Concern Over Hygon Information Technology Co., Ltd.'s (SHSE:688041) Massive 27% Price Jump

Hygon Information Technology Co., Ltd. (SHSE:688041) shareholders have had their patience rewarded with a 27% share price jump in the last month. The annual gain comes to 102% following the latest surge, making investors sit up and take notice.

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 41.3x, when you consider almost half of the companies in the Semiconductor industry in China have P/S ratios under 7.7x and even P/S lower than 3x aren't out of the ordinary. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Hygon Information Technology

How Has Hygon Information Technology Performed Recently?

Recent times have been advantageous for Hygon Information Technology as its revenues have been rising faster than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on analyst estimates for the company? Then our free report on Hygon Information Technology will help you uncover what's on the horizon.

Do Revenue Forecasts Match The High P/S Ratio?

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.

If we review the last year of revenue growth, the company posted a terrific increase of 52%. The strong recent performance means it was also able to grow revenue by 297% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 44% per annum during the coming three years according to the twelve analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 49% per year, which is noticeably more attractive.

With this in consideration, we believe it doesn't make sense that Hygon Information Technology's P/S is outpacing its industry peers. 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?

Hygon Information Technology's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

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. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You always need to take note of risks, for example - Hygon Information Technology has 1 warning sign we think you should be aware of.

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.