China High Precision Automation Group Limited's (HKG:591) 43% Share Price Surge Not Quite Adding Up

China High Precision Automation Group Limited (HKG:591) shares have had a really impressive month, gaining 43% after a shaky period beforehand. The last month tops off a massive increase of 150% in the last year.

Following the firm bounce in price, you could be forgiven for thinking China High Precision Automation Group 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 Electronic industry have P/S ratios below 0.3x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

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View our latest analysis for China High Precision Automation Group

What Does China High Precision Automation Group's Recent Performance Look Like?

China High Precision Automation Group has been doing a good job lately as it's been growing revenue at a solid pace. It might be that many expect the respectable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Is There Enough Revenue Growth Forecasted For China High Precision Automation Group?

The only time you'd be truly comfortable seeing a P/S as high as China High Precision Automation Group's is when the company's growth is on track to outshine the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 28%. Revenue has also lifted 26% in aggregate from three years ago, mostly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 19% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in mind, we find it worrying that China High Precision Automation Group'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. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Bottom Line On China High Precision Automation Group's P/S

The large bounce in China High Precision Automation Group's shares has lifted the company's P/S handsomely. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

The fact that China High Precision Automation Group 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 there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for China High Precision Automation Group that you should be aware of.

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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.