Jiangsu HHCK Advanced Materials Co.,Ltd's (SHSE:688535) 31% Price Boost Is Out Of Tune With Revenues

Despite an already strong run, Jiangsu HHCK Advanced Materials Co.,Ltd (SHSE:688535) shares have been powering on, with a gain of 31% in the last thirty days. Notwithstanding the latest gain, the annual share price return of 8.4% isn't as impressive.

After such a large jump in price, Jiangsu HHCK Advanced MaterialsLtd may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 23.5x, when you consider almost half of the companies in the Semiconductor industry in China have P/S ratios under 7.4x 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 Jiangsu HHCK Advanced MaterialsLtd

How Has Jiangsu HHCK Advanced MaterialsLtd Performed Recently?

With revenue growth that's inferior to most other companies of late, Jiangsu HHCK Advanced MaterialsLtd has been relatively sluggish. It might be that many expect the uninspiring revenue performance to recover significantly, which has kept the P/S ratio from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Jiangsu HHCK Advanced MaterialsLtd.

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

Jiangsu HHCK Advanced MaterialsLtd's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 6.9% last year. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 8.3% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Shifting to the future, estimates from the sole analyst covering the company suggest revenue should grow by 27% over the next year. That's shaping up to be materially lower than the 42% growth forecast for the broader industry.

In light of this, it's alarming that Jiangsu HHCK Advanced MaterialsLtd'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. 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.

The Final Word

The strong share price surge has lead to Jiangsu HHCK Advanced MaterialsLtd's P/S soaring as well. 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.

It comes as a surprise to see Jiangsu HHCK Advanced MaterialsLtd trade at such a high P/S given the revenue forecasts look less than stellar. 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. 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 Jiangsu HHCK Advanced MaterialsLtd.

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.