Hangzhou Huaxing Chuangye Communication Technology Co., Ltd. (SZSE:300025) Investors Are Less Pessimistic Than Expected

When close to half the companies in the Telecom industry in China have price-to-sales ratios (or "P/S") below 3x, you may consider Hangzhou Huaxing Chuangye Communication Technology Co., Ltd. (SZSE:300025) as a stock to avoid entirely with its 6.2x P/S ratio. 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 Hangzhou Huaxing Chuangye Communication Technology

What Does Hangzhou Huaxing Chuangye Communication Technology's P/S Mean For Shareholders?

The recent revenue growth at Hangzhou Huaxing Chuangye Communication Technology would have to be considered satisfactory if not spectacular. One possibility is that the P/S ratio is high because investors think this good 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 Hangzhou Huaxing Chuangye Communication Technology's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Hangzhou Huaxing Chuangye Communication Technology?

The only time you'd be truly comfortable seeing a P/S as steep as Hangzhou Huaxing Chuangye Communication Technology's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered a decent 3.9% gain to the company's revenues. Still, lamentably revenue has fallen 11% in aggregate from three years ago, which is disappointing. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 4.6% shows it's an unpleasant look.

In light of this, it's alarming that Hangzhou Huaxing Chuangye Communication Technology'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 Bottom Line On Hangzhou Huaxing Chuangye Communication Technology's P/S

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Hangzhou Huaxing Chuangye Communication Technology currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. 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. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Hangzhou Huaxing Chuangye Communication Technology (of which 1 can't be ignored!) you should know about.

If these risks are making you reconsider your opinion on Hangzhou Huaxing Chuangye Communication Technology, 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com