Ruifeng Power Group Company Limited (HKG:2025) Stock Rockets 32% As Investors Are Less Pessimistic Than Expected

Ruifeng Power Group Company Limited (HKG:2025) shareholders have had their patience rewarded with a 32% share price jump in the last month. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 7.9% in the last twelve months.

After such a large jump in price, given close to half the companies operating in Hong Kong's Auto Components industry have price-to-sales ratios (or "P/S") below 0.4x, you may consider Ruifeng Power Group as a stock to potentially avoid with its 1.4x 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 as high as it is.

See our latest analysis for Ruifeng Power Group

What Does Ruifeng Power Group's Recent Performance Look Like?

Revenue has risen firmly for Ruifeng Power Group recently, which is pleasing to see. It might be that many expect the respectable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. However, if this isn't the case, investors might get caught out paying too much for the stock.

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 Ruifeng Power Group's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Ruifeng Power Group?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Ruifeng Power Group's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 23% gain to the company's top line. As a result, it also grew revenue by 26% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 18% shows it's noticeably less attractive.

With this in mind, we find it worrying that Ruifeng Power Group'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.

The Final Word

Ruifeng Power Group's P/S is on the rise since its shares have risen strongly. 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.

Our examination of Ruifeng Power Group revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Ruifeng Power Group (1 can't be ignored) you should be aware of.

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.