What Synertone Communication Corporation's (HKG:1613) 37% Share Price Gain Is Not Telling You

Synertone Communication Corporation (HKG:1613) shares have had a really impressive month, gaining 37% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 66%.

After such a large jump in price, you could be forgiven for thinking Synertone Communication is a stock not worth researching with a price-to-sales ratios (or "P/S") of 1.7x, considering almost half the companies in Hong Kong's Communications industry have P/S ratios below 0.5x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

See our latest analysis for Synertone Communication

How Has Synertone Communication Performed Recently?

With revenue growth that's exceedingly strong of late, Synertone Communication 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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 Synertone Communication's earnings, revenue and cash flow.

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

There's an inherent assumption that a company should outperform the industry for P/S ratios like Synertone Communication's to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 108%. Revenue has also lifted 17% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Comparing that to the industry, which is predicted to deliver 34% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this in mind, we find it worrying that Synertone Communication's P/S exceeds that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What Does Synertone Communication's P/S Mean For Investors?

Synertone Communication shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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 Synertone Communication currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

You should always think about risks. Case in point, we've spotted 3 warning signs for Synertone Communication you should be aware of, and 1 of them makes us a bit uncomfortable.

If you're unsure about the strength of Synertone Communication'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.