Hua Ying Technology (Gruop) Co., Ltd.'s (SZSE:000536) 31% Price Boost Is Out Of Tune With Revenues

Hua Ying Technology (Gruop) Co., Ltd. (SZSE:000536) shareholders have had their patience rewarded with a 31% share price jump in the last month. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 15% in the last twelve months.

Since its price has surged higher, you could be forgiven for thinking Hua Ying Technology (Gruop) is a stock not worth researching with a price-to-sales ratios (or "P/S") of 4.2x, considering almost half the companies in China's Electronic industry have P/S ratios below 3.2x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

Check out our latest analysis for Hua Ying Technology (Gruop)

What Does Hua Ying Technology (Gruop)'s P/S Mean For Shareholders?

The revenue growth achieved at Hua Ying Technology (Gruop) over the last year would be more than acceptable for most companies. One possibility is that the P/S ratio is high because investors think this respectable revenue growth will be enough to outperform the broader industry in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Hua Ying Technology (Gruop) will help you shine a light on its historical performance.

How Is Hua Ying Technology (Gruop)'s Revenue Growth Trending?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Hua Ying Technology (Gruop)'s to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 25% last year. However, this wasn't enough as the latest three year period has seen the company endure a nasty 38% drop in revenue in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 29% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that Hua Ying Technology (Gruop)'s P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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.

What We Can Learn From Hua Ying Technology (Gruop)'s P/S?

The large bounce in Hua Ying Technology (Gruop)'s shares has lifted the company's P/S handsomely. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Hua Ying Technology (Gruop) revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. 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. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

You should always think about risks. Case in point, we've spotted 1 warning sign for Hua Ying Technology (Gruop) you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.