Henan Carve Electronics Technology Co., Ltd.'s (SZSE:301182) Shares Climb 49% But Its Business Is Yet to Catch Up

Henan Carve Electronics Technology Co., Ltd. (SZSE:301182) shareholders would be excited to see that the share price has had a great month, posting a 49% gain and recovering from prior weakness. Looking further back, the 25% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Although its price has surged higher, it's still not a stretch to say that Henan Carve Electronics Technology's price-to-sales (or "P/S") ratio of 4.1x right now seems quite "middle-of-the-road" compared to the Electronic industry in China, where the median P/S ratio is around 4x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for Henan Carve Electronics Technology

How Henan Carve Electronics Technology Has Been Performing

Recent times have been quite advantageous for Henan Carve Electronics Technology as its revenue has been rising very briskly. It might be that many expect the strong revenue performance to wane, which has kept the share price, and thus the P/S ratio, from rising. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Henan Carve Electronics Technology will help you shine a light on its historical performance.

Is There Some Revenue Growth Forecasted For Henan Carve Electronics Technology?

The only time you'd be comfortable seeing a P/S like Henan Carve Electronics Technology's is when the company's growth is tracking the industry closely.

If we review the last year of revenue growth, the company posted a terrific increase of 43%. The latest three year period has also seen a 23% overall rise in revenue, aided extensively by its short-term performance. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

This is in contrast to the rest of the industry, which is expected to grow by 26% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's curious that Henan Carve Electronics Technology's P/S sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

The Bottom Line On Henan Carve Electronics Technology's P/S

Henan Carve Electronics Technology's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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 Henan Carve Electronics Technology revealed its poor three-year revenue trends aren't resulting in a lower P/S as per our expectations, given they look worse than current industry outlook. Right now we are uncomfortable with the P/S as this revenue performance isn't likely to support a more positive sentiment for long. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Henan Carve Electronics Technology that you should be aware of.

If you're unsure about the strength of Henan Carve Electronics Technology'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.