Hengxin Shambala Culture Co.,Ltd.'s (SZSE:300081) Shares Climb 32% But Its Business Is Yet to Catch Up

Hengxin Shambala Culture Co.,Ltd. (SZSE:300081) shareholders have had their patience rewarded with a 32% share price jump in the last month. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 33% over that time.

Following the firm bounce in price, Hengxin Shambala CultureLtd's price-to-sales (or "P/S") ratio of 8.8x might make it look like a strong sell right now compared to other companies in the Software industry in China, where around half of the companies have P/S ratios below 4.9x and even P/S below 2x are quite common. 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.

See our latest analysis for Hengxin Shambala CultureLtd

How Hengxin Shambala CultureLtd Has Been Performing

For instance, Hengxin Shambala CultureLtd's receding revenue in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

Although there are no analyst estimates available for Hengxin Shambala CultureLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Hengxin Shambala CultureLtd's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Hengxin Shambala CultureLtd's to be considered reasonable.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 26%. The last three years don't look nice either as the company has shrunk revenue by 1.7% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 26% shows it's an unpleasant look.

In light of this, it's alarming that Hengxin Shambala CultureLtd's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Final Word

Shares in Hengxin Shambala CultureLtd have seen a strong upwards swing lately, which has really helped boost its P/S figure. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Hengxin Shambala CultureLtd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Having said that, be aware Hengxin Shambala CultureLtd is showing 3 warning signs in our investment analysis, and 2 of those are a bit concerning.

If you're unsure about the strength of Hengxin Shambala CultureLtd'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.