Hillstone Networks Co.,Ltd.'s (SHSE:688030) Shares Leap 34% Yet They're Still Not Telling The Full Story

The Hillstone Networks Co.,Ltd. (SHSE:688030) share price has done very well over the last month, posting an excellent gain of 34%. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 29% in the last twelve months.

Although its price has surged higher, Hillstone NetworksLtd may still be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 2.7x, since almost half of all companies in the IT industry in China have P/S ratios greater than 3.8x and even P/S higher than 8x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

Check out our latest analysis for Hillstone NetworksLtd

How Hillstone NetworksLtd Has Been Performing

Hillstone NetworksLtd certainly has been doing a good job lately as it's been growing revenue more than most other companies. It might be that many expect the strong revenue performance to degrade substantially, which has repressed the share price, and thus the P/S ratio. If the company manages to stay the course, then investors should be rewarded with a share price that matches its revenue figures.

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

How Is Hillstone NetworksLtd's Revenue Growth Trending?

In order to justify its P/S ratio, Hillstone NetworksLtd would need to produce sluggish growth that's trailing the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 14%. The latest three year period has also seen a 14% overall rise in revenue, aided somewhat by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 28% during the coming year according to the sole analyst following the company. With the industry only predicted to deliver 20%, the company is positioned for a stronger revenue result.

In light of this, it's peculiar that Hillstone NetworksLtd's P/S sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

What We Can Learn From Hillstone NetworksLtd's P/S?

The latest share price surge wasn't enough to lift Hillstone NetworksLtd's P/S close to the industry median. 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.

Hillstone NetworksLtd's analyst forecasts revealed that its superior revenue outlook isn't contributing to its P/S anywhere near as much as we would have predicted. When we see strong growth forecasts like this, we can only assume potential risks are what might be placing significant pressure on the P/S ratio. It appears the market could be anticipating revenue instability, because these conditions should normally provide a boost to the share price.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Hillstone NetworksLtd with six simple checks.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.