Optimistic Investors Push Hangzhou Huaxing Chuangye Communication Technology Co., Ltd. (SZSE:300025) Shares Up 40% But Growth Is Lacking

The Hangzhou Huaxing Chuangye Communication Technology Co., Ltd. (SZSE:300025) share price has done very well over the last month, posting an excellent gain of 40%. Taking a wider view, although not as strong as the last month, the full year gain of 23% is also fairly reasonable.

Following the firm bounce in price, Hangzhou Huaxing Chuangye Communication Technology's price-to-sales (or "P/S") ratio of 9.5x might make it look like a strong sell right now compared to other companies in the Telecom industry in China, where around half of the companies have P/S ratios below 4.1x 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 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. If not, then existing shareholders may be quite nervous about the viability of the share price.

Although there are no analyst estimates available for Hangzhou Huaxing Chuangye Communication Technology, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Hangzhou Huaxing Chuangye Communication Technology's to be considered reasonable.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 4.2%. The last three years don't look nice either as the company has shrunk revenue by 8.0% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 5.0% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we find it worrying that Hangzhou Huaxing Chuangye Communication Technology'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. 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.

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

Hangzhou Huaxing Chuangye Communication Technology's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

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. 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.

Having said that, be aware Hangzhou Huaxing Chuangye Communication Technology is showing 2 warning signs in our investment analysis, and 1 of those is potentially serious.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.