Henan Shijia Photons Technology Co., Ltd.'s (SHSE:688313) 25% Price Boost Is Out Of Tune With Revenues

Henan Shijia Photons Technology Co., Ltd. (SHSE:688313) shares have continued their recent momentum with a 25% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 62% in the last year.

Following the firm bounce in price, Henan Shijia Photons Technology may be sending bearish signals at the moment with its price-to-sales (or "P/S") ratio of 8.4x, since almost half of all companies in the Semiconductor in China have P/S ratios under 6.1x and even P/S lower than 3x are not unusual. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Henan Shijia Photons Technology

What Does Henan Shijia Photons Technology's P/S Mean For Shareholders?

Henan Shijia Photons Technology certainly has been doing a good job lately as it's been growing revenue more than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

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

Henan Shijia Photons Technology's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Taking a look back first, we see that the company grew revenue by an impressive 24% last year. Revenue has also lifted 28% in aggregate from three years ago, mostly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Shifting to the future, estimates from the dual analysts covering the company suggest revenue should grow by 27% over the next year. That's shaping up to be materially lower than the 54% growth forecast for the broader industry.

In light of this, it's alarming that Henan Shijia Photons Technology's P/S sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. 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.

The Final Word

Henan Shijia Photons Technology shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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 Henan Shijia Photons Technology currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. 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.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Henan Shijia Photons Technology (1 can't be ignored) you should be aware of.

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.