What Hygon Information Technology Co., Ltd.'s (SHSE:688041) 32% Share Price Gain Is Not Telling You

Hygon Information Technology Co., Ltd. (SHSE:688041) shares have continued their recent momentum with a 32% gain in the last month alone. The annual gain comes to 122% following the latest surge, making investors sit up and take notice.

After such a large jump in price, Hygon Information Technology may be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 44.3x, since almost half of all companies in the Semiconductor industry in China have P/S ratios under 7.1x and even P/S lower than 3x are not unusual. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Hygon Information Technology

How Has Hygon Information Technology Performed Recently?

With revenue growth that's superior to most other companies of late, Hygon Information Technology has been doing relatively well. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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.

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.

Retrospectively, the last year delivered an exceptional 56% gain to the company's top line. 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.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 36% over the next year. With the industry predicted to deliver 49% growth, the company is positioned for a weaker revenue result.

In light of this, it's alarming that Hygon Information Technology's P/S sits above the majority of other companies. 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. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

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

The strong share price surge has lead to Hygon Information Technology'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.

It comes as a surprise to see Hygon Information Technology trade at such a high P/S given the revenue forecasts look less than stellar. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Plus, you should also learn about this 1 warning sign we've spotted with Hygon Information Technology.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.