Shanghai @hub Co.,Ltd.'s (SHSE:603881) 27% Price Boost Is Out Of Tune With Revenues

Shanghai @hub Co.,Ltd. (SHSE:603881) shares have continued their recent momentum with a 27% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 41% in the last year.

After such a large jump in price, Shanghai @hubLtd may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 8x, when you consider almost half of the companies in the IT industry in China have P/S ratios under 4.5x and even P/S lower than 2x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

Check out our latest analysis for Shanghai @hubLtd

What Does Shanghai @hubLtd's P/S Mean For Shareholders?

With revenue growth that's inferior to most other companies of late, Shanghai @hubLtd has been relatively sluggish. One possibility is that the P/S ratio is high because investors think this lacklustre revenue performance will improve markedly. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Shanghai @hubLtd.

How Is Shanghai @hubLtd's Revenue Growth Trending?

In order to justify its P/S ratio, Shanghai @hubLtd would need to produce outstanding growth that's well in excess of the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 9.0% last year. Pleasingly, revenue has also lifted 45% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 12% each year as estimated by the six analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 16% per year, which is noticeably more attractive.

With this in consideration, we believe it doesn't make sense that Shanghai @hubLtd'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. 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 Bottom Line On Shanghai @hubLtd's P/S

Shanghai @hubLtd's P/S has grown nicely over the last month thanks to a handy boost in the share price. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

It comes as a surprise to see Shanghai @hubLtd 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. At these price levels, investors should remain cautious, particularly if things don't improve.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Shanghai @hubLtd that you should be aware of.

If you're unsure about the strength of Shanghai @hubLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.