Guangdong High Dream Intellectualized Machinery Co., Ltd.'s (SZSE:300720) 43% Price Boost Is Out Of Tune With Revenues

Guangdong High Dream Intellectualized Machinery Co., Ltd. (SZSE:300720) shareholders have had their patience rewarded with a 43% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 40%.

Following the firm bounce in price, Guangdong High Dream Intellectualized Machinery's price-to-sales (or "P/S") ratio of 15x might make it look like a strong sell right now compared to other companies in the Electronic industry in China, where around half of the companies have P/S ratios below 4x and even P/S below 2x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Check out our latest analysis for Guangdong High Dream Intellectualized Machinery

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

The revenue growth achieved at Guangdong High Dream Intellectualized Machinery over the last year would be more than acceptable for most companies. 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.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Guangdong High Dream Intellectualized Machinery will help you shine a light on its historical performance.

How Is Guangdong High Dream Intellectualized Machinery's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Guangdong High Dream Intellectualized Machinery's to be considered reasonable.

Retrospectively, the last year delivered a decent 10% gain to the company's revenues. Still, lamentably revenue has fallen 4.0% in aggregate from three years ago, which is disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 26% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's alarming that Guangdong High Dream Intellectualized Machinery's P/S sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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

Guangdong High Dream Intellectualized Machinery's P/S has grown nicely over the last month thanks to a handy boost in the share price. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that Guangdong High Dream Intellectualized Machinery currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. 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.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Guangdong High Dream Intellectualized Machinery (2 don't sit too well with us!) that you should be aware of before investing here.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.