Guangdong High Dream Intellectualized Machinery Co., Ltd.'s (SZSE:300720) 30% Share Price Surge Not Quite Adding Up

Despite an already strong run, Guangdong High Dream Intellectualized Machinery Co., Ltd. (SZSE:300720) shares have been powering on, with a gain of 30% in the last thirty days. The last 30 days bring the annual gain to a very sharp 60%.

Following the firm bounce in price, you could be forgiven for thinking Guangdong High Dream Intellectualized Machinery is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 16.6x, considering almost half the companies in China's Electronic industry have P/S ratios below 3.7x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for Guangdong High Dream Intellectualized Machinery

What Does Guangdong High Dream Intellectualized Machinery's Recent Performance Look Like?

Revenue has risen firmly for Guangdong High Dream Intellectualized Machinery recently, which is pleasing to see. It might be that many expect the respectable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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 worthy increase of 14%. Still, lamentably revenue has fallen 1.3% in aggregate from three years ago, which is disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

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

With this in mind, we find it worrying that Guangdong High Dream Intellectualized Machinery's P/S exceeds that of its industry peers. 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. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Final Word

The strong share price surge has lead to Guangdong High Dream Intellectualized Machinery's P/S soaring as well. 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 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. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Guangdong High Dream Intellectualized Machinery (1 shouldn't be ignored!) that you should be aware of before investing here.

If these risks are making you reconsider your opinion on Guangdong High Dream Intellectualized Machinery, 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.