More Unpleasant Surprises Could Be In Store For Hangzhou Huaxing Chuangye Communication Technology Co., Ltd.'s (SZSE:300025) Shares After Tumbling 41%

Hangzhou Huaxing Chuangye Communication Technology Co., Ltd. (SZSE:300025) shares have had a horrible month, losing 41% after a relatively good period beforehand. The last month has meant the stock is now only up 7.7% during the last year.

Although its price has dipped substantially, Hangzhou Huaxing Chuangye Communication Technology may still be sending bearish signals at the moment with its price-to-sales (or "P/S") ratio of 6.2x, since almost half of all companies in the Telecom in China have P/S ratios under 4.3x and even P/S lower than 2x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

View our latest analysis for Hangzhou Huaxing Chuangye Communication Technology

What Does Hangzhou Huaxing Chuangye Communication Technology's Recent Performance Look Like?

For example, consider that Hangzhou Huaxing Chuangye Communication Technology's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

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 high as Hangzhou Huaxing Chuangye Communication Technology's is when the company's growth is on track to outshine the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 4.2%. This means it has also seen a slide in revenue over the longer-term as revenue is down 8.0% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 4.9% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that Hangzhou Huaxing Chuangye Communication Technology is trading at a P/S higher than the industry. 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 Final Word

Hangzhou Huaxing Chuangye Communication Technology's P/S remain high even after its stock plunged. 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.

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. 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. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Hangzhou Huaxing Chuangye Communication Technology that you should be aware of.

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.

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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.