Huabang Technology Holdings Limited's (HKG:3638) 28% Price Boost Is Out Of Tune With Revenues

Despite an already strong run, Huabang Technology Holdings Limited (HKG:3638) shares have been powering on, with a gain of 28% in the last thirty days. Unfortunately, despite the strong performance over the last month, the full year gain of 5.3% isn't as attractive.

After such a large jump in price, when almost half of the companies in Hong Kong's Electronic industry have price-to-sales ratios (or "P/S") below 0.4x, you may consider Huabang Technology Holdings as a stock probably not worth researching with its 1.1x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

View our latest analysis for Huabang Technology Holdings

What Does Huabang Technology Holdings' Recent Performance Look Like?

For example, consider that Huabang Technology Holdings' financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

How Is Huabang Technology Holdings' Revenue Growth Trending?

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

Retrospectively, the last year delivered a frustrating 9.9% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 46% 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 19% shows it's an unpleasant look.

In light of this, it's alarming that Huabang Technology Holdings' P/S sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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.

What Does Huabang Technology Holdings' P/S Mean For Investors?

Huabang Technology Holdings' P/S is on the rise since its shares have risen strongly. 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.

We've established that Huabang Technology Holdings currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. 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 Huabang Technology Holdings (2 are concerning) you should be aware of.

If these risks are making you reconsider your opinion on Huabang Technology Holdings, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.