Guangdong Fenghua Advanced Technology (Holding) Co., Ltd.'s (SZSE:000636) Share Price Could Signal Some Risk

When you see that almost half of the companies in the Electronic industry in China have price-to-sales ratios (or "P/S") below 3.2x, Guangdong Fenghua Advanced Technology (Holding) Co., Ltd. (SZSE:000636) looks to be giving off some sell signals with its 4x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Guangdong Fenghua Advanced Technology (Holding)

What Does Guangdong Fenghua Advanced Technology (Holding)'s P/S Mean For Shareholders?

Guangdong Fenghua Advanced Technology (Holding) certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. If not, then existing shareholders might be a little nervous about the viability of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Guangdong Fenghua Advanced Technology (Holding).

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

There's an inherent assumption that a company should outperform the industry for P/S ratios like Guangdong Fenghua Advanced Technology (Holding)'s to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 17%. However, this wasn't enough as the latest three year period has seen the company endure a nasty 9.6% drop in revenue in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 26% as estimated by the four analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 25%, which is not materially different.

In light of this, it's curious that Guangdong Fenghua Advanced Technology (Holding)'s P/S sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

What Does Guangdong Fenghua Advanced Technology (Holding)'s P/S Mean For Investors?

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.

Given Guangdong Fenghua Advanced Technology (Holding)'s future revenue forecasts are in line with the wider industry, the fact that it trades at an elevated P/S is somewhat surprising. Right now we are uncomfortable with the relatively high share price as the predicted future revenues aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

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 Guangdong Fenghua Advanced Technology (Holding) with six simple checks.

If these risks are making you reconsider your opinion on Guangdong Fenghua Advanced Technology (Holding), explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.

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