China In-Tech Limited's (HKG:464) 25% Share Price Surge Not Quite Adding Up

China In-Tech Limited (HKG:464) shares have continued their recent momentum with a 25% gain in the last month alone. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 6.0% over the last year.

Following the firm bounce in price, given close to half the companies operating in Hong Kong's Consumer Durables industry have price-to-sales ratios (or "P/S") below 0.5x, you may consider China In-Tech 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.

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View our latest analysis for China In-Tech

What Does China In-Tech's P/S Mean For Shareholders?

Revenue has risen firmly for China In-Tech recently, which is pleasing to see. Perhaps the market is expecting this decent revenue performance to beat out the industry over the near term, which has kept the P/S propped up. If not, then existing shareholders may be a little nervous about the viability of the share price.

Although there are no analyst estimates available for China In-Tech, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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

In order to justify its P/S ratio, China In-Tech would need to produce impressive growth in excess of the industry.

Taking a look back first, we see that the company grew revenue by an impressive 29% last year. However, this wasn't enough as the latest three year period has seen the company endure a nasty 48% drop in revenue in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 9.5% shows it's an unpleasant look.

With this information, we find it concerning that China In-Tech is trading at a P/S higher than the industry. 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

The large bounce in China In-Tech's shares has lifted the company's P/S handsomely. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that China In-Tech currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. 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 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.

Before you take the next step, you should know about the 4 warning signs for China In-Tech (1 is potentially serious!) that we have uncovered.

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.