Guangdong High Dream Intellectualized Machinery Co., Ltd. (SZSE:300720) Stock Rockets 27% As Investors Are Less Pessimistic Than Expected

Despite an already strong run, Guangdong High Dream Intellectualized Machinery Co., Ltd. (SZSE:300720) shares have been powering on, with a gain of 27% in the last thirty days. The last 30 days bring the annual gain to a very sharp 75%.

Since its price has surged higher, Guangdong High Dream Intellectualized Machinery may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 18.3x, when you consider almost half of the companies in the Electronic industry in China have P/S ratios under 4.5x and even P/S lower than 2x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

View our latest analysis for Guangdong High Dream Intellectualized Machinery

What Does Guangdong High Dream Intellectualized Machinery's P/S Mean For Shareholders?

Guangdong High Dream Intellectualized Machinery has been doing a good job lately as it's been growing revenue at a solid pace. 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.

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 Guangdong High Dream Intellectualized Machinery's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Guangdong High Dream Intellectualized Machinery?

Guangdong High Dream Intellectualized Machinery's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 19%. Although, its longer-term performance hasn't been as strong with three-year revenue growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 26% shows it's an unpleasant look.

In light of this, it's alarming that Guangdong High Dream Intellectualized Machinery's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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 Bottom Line On Guangdong High Dream Intellectualized Machinery's P/S

Shares in Guangdong High Dream Intellectualized Machinery have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

Our examination of Guangdong High Dream Intellectualized Machinery 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. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You should always think about risks. Case in point, we've spotted 3 warning signs for Guangdong High Dream Intellectualized Machinery you should be aware of, and 1 of them makes us a bit uncomfortable.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.