Wenzhou Hongfeng Electrical Alloy Co., Ltd.'s (SZSE:300283) Price Is Right But Growth Is Lacking After Shares Rocket 36%

Wenzhou Hongfeng Electrical Alloy Co., Ltd. (SZSE:300283) shares have continued their recent momentum with a 36% gain in the last month alone. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

Even after such a large jump in price, Wenzhou Hongfeng Electrical Alloy may still be sending very bullish signals at the moment with its price-to-sales (or "P/S") ratio of 1x, since almost half of all companies in the Electronic industry in China have P/S ratios greater than 4x and even P/S higher than 8x are not unusual. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Wenzhou Hongfeng Electrical Alloy

What Does Wenzhou Hongfeng Electrical Alloy's P/S Mean For Shareholders?

The revenue growth achieved at Wenzhou Hongfeng Electrical Alloy over the last year would be more than acceptable for most companies. Perhaps the market is expecting this acceptable revenue performance to take a dive, which has kept the P/S suppressed. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Wenzhou Hongfeng Electrical Alloy's earnings, revenue and cash flow.

Is There Any Revenue Growth Forecasted For Wenzhou Hongfeng Electrical Alloy?

There's an inherent assumption that a company should far underperform the industry for P/S ratios like Wenzhou Hongfeng Electrical Alloy's to be considered reasonable.

Retrospectively, the last year delivered a decent 14% gain to the company's revenues. The solid recent performance means it was also able to grow revenue by 23% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 26% shows it's noticeably less attractive.

With this in consideration, it's easy to understand why Wenzhou Hongfeng Electrical Alloy's P/S falls short of the mark set by its industry peers. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

What Does Wenzhou Hongfeng Electrical Alloy's P/S Mean For Investors?

Even after such a strong price move, Wenzhou Hongfeng Electrical Alloy's P/S still trails the rest of the industry. 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.

In line with expectations, Wenzhou Hongfeng Electrical Alloy maintains its low P/S on the weakness of its recent three-year growth being lower than the wider industry forecast. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Wenzhou Hongfeng Electrical Alloy (2 are a bit unpleasant!) that you need to be mindful of.

If these risks are making you reconsider your opinion on Wenzhou Hongfeng Electrical Alloy, explore our interactive list of high quality stocks to get an idea of what else is out there.

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.