Revenues Not Telling The Story For Wuhan Huazhong Numerical Control System, Inc. (SZSE:300161) After Shares Rise 27%

Those holding Wuhan Huazhong Numerical Control System, Inc. (SZSE:300161) shares would be relieved that the share price has rebounded 27% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Looking further back, the 22% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

In spite of the firm bounce in price, it's still not a stretch to say that Wuhan Huazhong Numerical Control System's price-to-sales (or "P/S") ratio of 3.4x right now seems quite "middle-of-the-road" compared to the Electronic industry in China, where the median P/S ratio is around 3.6x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

View our latest analysis for Wuhan Huazhong Numerical Control System

How Wuhan Huazhong Numerical Control System Has Been Performing

With revenue growth that's superior to most other companies of late, Wuhan Huazhong Numerical Control System has been doing relatively well. Perhaps the market is expecting this level of performance to taper off, keeping the P/S from soaring. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Keen to find out how analysts think Wuhan Huazhong Numerical Control System'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 P/S?

In order to justify its P/S ratio, Wuhan Huazhong Numerical Control System would need to produce growth that's similar to the industry.

Taking a look back first, we see that the company grew revenue by an impressive 27% last year. The strong recent performance means it was also able to grow revenue by 59% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 29% during the coming year according to the one analyst following the company. That's shaping up to be materially lower than the 60% growth forecast for the broader industry.

With this in mind, we find it intriguing that Wuhan Huazhong Numerical Control System's P/S is closely matching its industry peers. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

Wuhan Huazhong Numerical Control System appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our look at the analysts forecasts of Wuhan Huazhong Numerical Control System's revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you settle on your opinion, we've discovered 2 warning signs for Wuhan Huazhong Numerical Control System that you should be aware of.

If you're unsure about the strength of Wuhan Huazhong Numerical Control System'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.