The Price Is Right For Zhejiang Hechuan Technology Co., Ltd. (SHSE:688320) Even After Diving 25%

Zhejiang Hechuan Technology Co., Ltd. (SHSE:688320) shareholders won't be pleased to see that the share price has had a very rough month, dropping 25% and undoing the prior period's positive performance. Looking at the bigger picture, even after this poor month the stock is up 50% in the last year.

Even after such a large drop in price, Zhejiang Hechuan Technology's price-to-sales (or "P/S") ratio of 7.8x might still make it look like a strong sell right now compared to other companies in the Electronic industry in China, where around half of the companies have P/S ratios below 4.5x and even P/S below 2x are quite common. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Zhejiang Hechuan Technology

What Does Zhejiang Hechuan Technology's P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, Zhejiang Hechuan Technology's revenue has gone into reverse gear, which is not great. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. However, if this isn't the case, investors might get caught out paying too much for the stock.

Keen to find out how analysts think Zhejiang Hechuan Technology's future stacks up against the industry? In that case, our free report is a great place to start.

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

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

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 27%. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 8.5% in total. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

Shifting to the future, estimates from the only analyst covering the company suggest revenue should grow by 34% over the next year. With the industry only predicted to deliver 26%, the company is positioned for a stronger revenue result.

With this in mind, it's not hard to understand why Zhejiang Hechuan Technology's P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Zhejiang Hechuan Technology's P/S

Even after such a strong price drop, Zhejiang Hechuan Technology's P/S still exceeds the industry median significantly. 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.

Our look into Zhejiang Hechuan Technology shows that its P/S ratio remains high on the merit of its strong future revenues. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Having said that, be aware Zhejiang Hechuan Technology is showing 1 warning sign in our investment analysis, you should know about.

If you're unsure about the strength of Zhejiang Hechuan Technology'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.