What Huazhang Technology Holding Limited's (HKG:1673) 34% Share Price Gain Is Not Telling You

Huazhang Technology Holding Limited (HKG:1673) shareholders have had their patience rewarded with a 34% share price jump in the last month. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 12% over that time.

In spite of the firm bounce in price, it's still not a stretch to say that Huazhang Technology Holding's price-to-sales (or "P/S") ratio of 1.1x right now seems quite "middle-of-the-road" compared to the Machinery industry in Hong Kong, where the median P/S ratio is around 0.7x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

See our latest analysis for Huazhang Technology Holding

What Does Huazhang Technology Holding's P/S Mean For Shareholders?

For example, consider that Huazhang Technology Holding's financial performance has been poor lately as its revenue has been in decline. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. If not, then existing shareholders may be a little nervous about the viability of the share price.

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 Huazhang Technology Holding's earnings, revenue and cash flow.

How Is Huazhang Technology Holding's Revenue Growth Trending?

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

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 15%. The last three years don't look nice either as the company has shrunk revenue by 9.8% in aggregate. 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 15% shows it's an unpleasant look.

In light of this, it's somewhat alarming that Huazhang Technology Holding's P/S sits in line with the majority of other companies. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

What We Can Learn From Huazhang Technology Holding's P/S?

Its shares have lifted substantially and now Huazhang Technology Holding's P/S is back within range of the industry median. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

The fact that Huazhang Technology Holding currently trades at a P/S on par with the rest of the industry is surprising to us since its recent revenues have been in decline over the medium-term, all while the industry is set to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Before you settle on your opinion, we've discovered 3 warning signs for Huazhang Technology Holding (1 doesn't sit too well with us!) that you should be aware of.

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.