China High Precision Automation Group Limited's (HKG:591) Shares Climb 35% But Its Business Is Yet to Catch Up

China High Precision Automation Group Limited (HKG:591) shareholders would be excited to see that the share price has had a great month, posting a 35% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 36% over that time.

After such a large jump in price, given close to half the companies operating in Hong Kong's Electronic industry have price-to-sales ratios (or "P/S") below 0.4x, you may consider China High Precision Automation Group as a stock to potentially avoid with its 0.9x 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.

See our latest analysis for China High Precision Automation Group

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

Revenue has risen at a steady rate over the last year for China High Precision Automation Group, which is generally not a bad outcome. One possibility is that the P/S ratio is high because investors think this good revenue growth will be 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.

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 China High Precision Automation Group's earnings, revenue and cash flow.

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

China High Precision Automation Group's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 3.5%. Pleasingly, revenue has also lifted 66% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 19% growth in the next 12 months, the company's momentum is pretty similar based on recent medium-term annualised revenue results.

With this information, we find it interesting that China High Precision Automation Group is trading at a high P/S compared to the industry. Apparently many investors in the company are more bullish than recent times would indicate and aren't willing to let go of their stock right now. Nevertheless, they may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Key Takeaway

China High Precision Automation Group 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.

Our examination of China High Precision Automation Group revealed its three-year revenue trends aren't impacting its high P/S as much as we would have predicted, given they look similar to current industry expectations. Right now we are uncomfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. Unless there is a significant improvement in the company's medium-term trends, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Plus, you should also learn about this 1 warning sign we've spotted with China High Precision Automation Group.

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.