Weigang Environmental Technology Holding Group Limited (HKG:1845) Stock Rockets 52% As Investors Are Less Pessimistic Than Expected

Weigang Environmental Technology Holding Group Limited (HKG:1845) shareholders are no doubt pleased to see that the share price has bounced 52% in the last month, although it is still struggling to make up recently lost ground. Notwithstanding the latest gain, the annual share price return of 8.9% isn't as impressive.

Since its price has surged higher, you could be forgiven for thinking Weigang Environmental Technology Holding Group is a stock not worth researching with a price-to-sales ratios (or "P/S") of 1.1x, considering almost half the companies in Hong Kong's Commercial Services industry have P/S ratios below 0.4x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

Check out our latest analysis for Weigang Environmental Technology Holding Group

How Has Weigang Environmental Technology Holding Group Performed Recently?

For example, consider that Weigang Environmental Technology Holding Group's financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Weigang Environmental Technology Holding Group will help you shine a light on its historical performance.

How Is Weigang Environmental Technology Holding Group's Revenue Growth Trending?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Weigang Environmental Technology Holding Group'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 27%. The last three years don't look nice either as the company has shrunk revenue by 53% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 6.3% shows it's an unpleasant look.

In light of this, it's alarming that Weigang Environmental Technology Holding Group's 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 Bottom Line On Weigang Environmental Technology Holding Group's P/S

The large bounce in Weigang Environmental Technology Holding Group's shares has lifted the company's P/S handsomely. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our examination of Weigang Environmental Technology Holding Group 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. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Weigang Environmental Technology Holding Group (2 are concerning) you should be aware of.

If you're unsure about the strength of Weigang Environmental Technology Holding Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com