Hao Tian International Construction Investment Group Limited (HKG:1341) Stock Rockets 46% As Investors Are Less Pessimistic Than Expected

Hao Tian International Construction Investment Group Limited (HKG:1341) shareholders would be excited to see that the share price has had a great month, posting a 46% gain and recovering from prior weakness. But the last month did very little to improve the 57% share price decline over the last year.

Since its price has surged higher, given around half the companies in Hong Kong's Trade Distributors industry have price-to-sales ratios (or "P/S") below 0.4x, you may consider Hao Tian International Construction Investment Group as a stock to avoid entirely with its 26x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Hao Tian International Construction Investment Group

How Has Hao Tian International Construction Investment Group Performed Recently?

As an illustration, revenue has deteriorated at Hao Tian International Construction Investment Group over the last year, which is not ideal at all. 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.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Hao Tian International Construction Investment Group will help you shine a light on its historical performance.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Hao Tian International Construction Investment Group would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a frustrating 17% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 19% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 3.3% shows it's an unpleasant look.

With this in mind, we find it worrying that Hao Tian International Construction Investment 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. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What Does Hao Tian International Construction Investment Group's P/S Mean For Investors?

The strong share price surge has lead to Hao Tian International Construction Investment Group's P/S soaring as well. 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 Hao Tian International Construction Investment Group 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. 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.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Hao Tian International Construction Investment Group (1 doesn't sit too well with us!) that you should be aware of before investing here.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.