Hua Ying Technology (Gruop) Co., Ltd.'s (SZSE:000536) 33% Price Boost Is Out Of Tune With Revenues

Hua Ying Technology (Gruop) Co., Ltd. (SZSE:000536) shares have continued their recent momentum with a 33% gain in the last month alone. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 3.1% in the last twelve months.

After such a large jump in price, Hua Ying Technology (Gruop)'s price-to-sales (or "P/S") ratio of 5.3x might make it look like a sell right now compared to the wider Electronic industry in China, where around half of the companies have P/S ratios below 4.2x and even P/S below 2x are quite common. 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?

Recent times have been quite advantageous for Hua Ying Technology (Gruop) as its revenue has been rising very briskly. Perhaps the market is expecting future revenue performance to outperform the wider market, which has seemingly got people interested in the stock. However, if this isn't the case, investors might get caught out paying too much for the stock.

Although there are no analyst estimates available for Hua Ying Technology (Gruop), take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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

In order to justify its P/S ratio, Hua Ying Technology (Gruop) would need to produce impressive growth in excess of the industry.

Retrospectively, the last year delivered an exceptional 74% gain to the company's top line. Still, revenue has fallen 36% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

In contrast to the company, the rest of the industry is expected to grow by 27% 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.

The Final Word

The large bounce in Hua Ying Technology (Gruop)'s shares has lifted the company's P/S handsomely. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

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.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Hua Ying Technology (Gruop) that you need to be mindful 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).

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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.