There's Reason For Concern Over Haina Intelligent Equipment International Holdings Limited's (HKG:1645) Massive 28% Price Jump

Haina Intelligent Equipment International Holdings Limited (HKG:1645) shareholders are no doubt pleased to see that the share price has bounced 28% in the last month, although it is still struggling to make up recently lost ground. The last 30 days bring the annual gain to a very sharp 61%.

After such a large jump in price, given close to half the companies operating in Hong Kong's Machinery industry have price-to-sales ratios (or "P/S") below 0.6x, you may consider Haina Intelligent Equipment International Holdings as a stock to potentially avoid with its 1.5x 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.

View our latest analysis for Haina Intelligent Equipment International Holdings

How Haina Intelligent Equipment International Holdings Has Been Performing

With revenue growth that's exceedingly strong of late, Haina Intelligent Equipment International Holdings has been doing very well. It seems that many are expecting the strong revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little 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 Haina Intelligent Equipment International Holdings will help you shine a light on its historical performance.

What Are Revenue Growth Metrics Telling Us About The High P/S?

The only time you'd be truly comfortable seeing a P/S as high as Haina Intelligent Equipment International Holdings' is when the company's growth is on track to outshine the industry.

Retrospectively, the last year delivered an exceptional 37% gain to the company's top line. However, this wasn't enough as the latest three year period has seen the company endure a nasty 9.6% drop in revenue in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 14% shows it's an unpleasant look.

In light of this, it's alarming that Haina Intelligent Equipment International Holdings' P/S sits above the majority of other companies. 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.

The Final Word

Haina Intelligent Equipment International Holdings shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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 Haina Intelligent Equipment International Holdings revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Haina Intelligent Equipment International Holdings (2 are a bit concerning!) that you should be aware of before investing here.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.