Henan Ancai Hi-Tech Co.,Ltd's (SHSE:600207) Share Price Boosted 30% But Its Business Prospects Need A Lift Too

The Henan Ancai Hi-Tech Co.,Ltd (SHSE:600207) share price has done very well over the last month, posting an excellent gain of 30%. Taking a wider view, although not as strong as the last month, the full year gain of 14% is also fairly reasonable.

Even after such a large jump in price, Henan Ancai Hi-TechLtd may still be sending very bullish signals at the moment with its price-to-sales (or "P/S") ratio of 1.2x, since almost half of all companies in the Electronic industry in China have P/S ratios greater than 4.3x and even P/S higher than 9x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

Check out our latest analysis for Henan Ancai Hi-TechLtd

What Does Henan Ancai Hi-TechLtd's Recent Performance Look Like?

Recent times haven't been great for Henan Ancai Hi-TechLtd as its revenue has been rising slower than most other companies. Perhaps the market is expecting the current trend of poor revenue growth to continue, which has kept the P/S suppressed. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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How Is Henan Ancai Hi-TechLtd's Revenue Growth Trending?

In order to justify its P/S ratio, Henan Ancai Hi-TechLtd would need to produce anemic growth that's substantially trailing the industry.

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. Still, the latest three year period has seen an excellent 77% overall rise in revenue, in spite of its uninspiring short-term performance. Accordingly, shareholders will be pleased, but also have some questions to ponder about the last 12 months.

Turning to the outlook, the next year should bring diminished returns, with revenue decreasing 4.0% as estimated by the two analysts watching the company. Meanwhile, the broader industry is forecast to expand by 26%, which paints a poor picture.

With this information, we are not surprised that Henan Ancai Hi-TechLtd is trading at a P/S lower than the industry. However, shrinking revenues are unlikely to lead to a stable P/S over the longer term. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

What We Can Learn From Henan Ancai Hi-TechLtd's P/S?

Henan Ancai Hi-TechLtd's recent share price jump still sees fails to bring its P/S alongside the industry median. 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.

It's clear to see that Henan Ancai Hi-TechLtd maintains its low P/S on the weakness of its forecast for sliding revenue, as expected. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless there's material change, it's hard to envision a situation where the stock price will rise drastically.

A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Henan Ancai Hi-TechLtd with six simple checks.

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.