It's Down 28% But Guangzhou Hexin Instrument Co.,Ltd. (SHSE:688622) Could Be Riskier Than It Looks

To the annoyance of some shareholders, Guangzhou Hexin Instrument Co.,Ltd. (SHSE:688622) shares are down a considerable 28% in the last month, which continues a horrid run for the company. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 59% loss during that time.

Although its price has dipped substantially, there still wouldn't be many who think Guangzhou Hexin InstrumentLtd's price-to-sales (or "P/S") ratio of 3x is worth a mention when the median P/S in China's Electronic industry is similar at about 3.6x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

View our latest analysis for Guangzhou Hexin InstrumentLtd

How Guangzhou Hexin InstrumentLtd Has Been Performing

Guangzhou Hexin InstrumentLtd certainly has been doing a good job lately as it's been growing revenue more than most other companies. One possibility is that the P/S ratio is moderate because investors think this strong revenue performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Guangzhou Hexin InstrumentLtd will help you uncover what's on the horizon.

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

There's an inherent assumption that a company should be matching the industry for P/S ratios like Guangzhou Hexin InstrumentLtd's to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 35% last year. The latest three year period has also seen a 21% overall rise in revenue, aided extensively by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 46% as estimated by the lone analyst watching the company. That's shaping up to be materially higher than the 23% growth forecast for the broader industry.

With this in consideration, we find it intriguing that Guangzhou Hexin InstrumentLtd's P/S is closely matching its industry peers. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

What Does Guangzhou Hexin InstrumentLtd's P/S Mean For Investors?

With its share price dropping off a cliff, the P/S for Guangzhou Hexin InstrumentLtd looks to be in line with the rest of the Electronic industry. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We've established that Guangzhou Hexin InstrumentLtd currently trades on a lower than expected P/S since its forecasted revenue growth is higher than the wider industry. There could be some risks that the market is pricing in, which is preventing the P/S ratio from matching the positive outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future revenue could see some volatility.

You should always think about risks. Case in point, we've spotted 1 warning sign for Guangzhou Hexin InstrumentLtd you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.