What NOVA Technology Corporation Limited's (SZSE:300921) 27% Share Price Gain Is Not Telling You

Despite an already strong run, NOVA Technology Corporation Limited (SZSE:300921) shares have been powering on, with a gain of 27% in the last thirty days. Taking a wider view, although not as strong as the last month, the full year gain of 14% is also fairly reasonable.

Following the firm bounce in price, NOVA Technology may be sending bearish signals at the moment with its price-to-sales (or "P/S") ratio of 6.1x, since almost half of all companies in the Telecom in China have P/S ratios under 4.6x 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.

Check out our latest analysis for NOVA Technology

How Has NOVA Technology Performed Recently?

NOVA Technology has been doing a decent job lately as it's been growing revenue at a reasonable pace. Perhaps the market believes the recent revenue performance is strong enough to outperform the industry, which has inflated the P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, NOVA Technology would need to produce impressive growth in excess of the industry.

Retrospectively, the last year delivered a decent 4.9% gain to the company's revenues. Revenue has also lifted 13% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 4.9% growth in the next 12 months, the company's momentum is pretty similar based on recent medium-term annualised revenue results.

In light of this, it's curious that NOVA Technology's P/S sits above the majority of other companies. It seems most investors are ignoring the fairly average recent growth rates and are willing to pay up for exposure to the stock. Nevertheless, they may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Final Word

NOVA Technology's P/S is on the rise since its shares have risen strongly. 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.

Our look into NOVA Technology has shown that it currently trades on a higher than expected P/S since its recent three-year growth is only in line with the wider industry forecast. When we see average revenue with industry-like growth combined with a high P/S, we suspect the share price is at risk of declining, bringing the P/S back in line with the industry too. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

We don't want to rain on the parade too much, but we did also find 4 warning signs for NOVA Technology (3 are potentially serious!) that you need to be mindful of.

If these risks are making you reconsider your opinion on NOVA 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.