A Piece Of The Puzzle Missing From Shuanghua Holdings Limited's (HKG:1241) 29% Share Price Climb

The Shuanghua Holdings Limited (HKG:1241) share price has done very well over the last month, posting an excellent gain of 29%. Unfortunately, despite the strong performance over the last month, the full year gain of 5.6% isn't as attractive.

Even after such a large jump in price, it's still not a stretch to say that Shuanghua Holdings' price-to-sales (or "P/S") ratio of 0.3x right now seems quite "middle-of-the-road" compared to the Auto Components industry in Hong Kong, where the median P/S ratio is around 0.4x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

Check out our latest analysis for Shuanghua Holdings

How Has Shuanghua Holdings Performed Recently?

With revenue growth that's exceedingly strong of late, Shuanghua Holdings has been doing very well. 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.

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

How Is Shuanghua Holdings' Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Shuanghua Holdings' to be considered reasonable.

Taking a look back first, we see that the company's revenues underwent some rampant growth over the last 12 months. Pleasingly, revenue has also lifted 146% in aggregate from three years ago, thanks to the last 12 months of explosive growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

This is in contrast to the rest of the industry, which is expected to grow by 18% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we find it interesting that Shuanghua Holdings is trading at a fairly similar P/S compared to the industry. It may be that most investors are not convinced the company can maintain its recent growth rates.

The Bottom Line On Shuanghua Holdings' P/S

Its shares have lifted substantially and now Shuanghua Holdings' P/S is back within range of the industry median. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We didn't quite envision Shuanghua Holdings' P/S sitting in line with the wider industry, considering the revenue growth over the last three-year is higher than the current industry outlook. It'd be fair to assume that potential risks the company faces could be the contributing factor to the lower than expected P/S. It appears some are indeed anticipating revenue instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

Before you settle on your opinion, we've discovered 2 warning signs for Shuanghua Holdings that you should be aware of.

If these risks are making you reconsider your opinion on Shuanghua Holdings, 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.