A Piece Of The Puzzle Missing From Hi-Lex Corporation's (TSE:7279) 28% Share Price Climb

Hi-Lex Corporation (TSE:7279) shares have continued their recent momentum with a 28% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 76%.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Hi-Lex's P/S ratio of 0.3x, since the median price-to-sales (or "P/S") ratio for the Auto Components industry in Japan is about the same. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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View our latest analysis for Hi-Lex

How Hi-Lex Has Been Performing

For instance, Hi-Lex's receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is moderate because investors think the company might still do enough to be in line with the broader industry in the near future. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

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 Hi-Lex's earnings, revenue and cash flow.

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

Hi-Lex's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 1.2%. Still, the latest three year period has seen an excellent 37% overall rise in revenue, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Weighing the recent medium-term upward revenue trajectory against the broader industry's one-year forecast for contraction of 0.04% shows it's a great look while it lasts.

With this in mind, we find it intriguing that Hi-Lex's P/S matches its industry peers. Apparently some shareholders believe the recent performance is at its limits and have been accepting lower selling prices.

What We Can Learn From Hi-Lex's P/S?

Hi-Lex appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry 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.

Our examination of Hi-Lex revealed its growing revenue over the medium-term hasn't helped elevate its P/S above that of the industry, which is surprising given the industry is set to shrink. When we see a history of positive growth in a struggling industry, but only an average P/S, we assume potential risks are what might be placing pressure on the P/S ratio. Without the guidance of analysts, perhaps shareholders are feeling uncertain over whether the revenue performance can continue amidst a declining industry outlook. It appears some are indeed anticipating revenue instability, because this relative performance should normally provide a boost to the share price.

You should always think about risks. Case in point, we've spotted 3 warning signs for Hi-Lex you should be aware of, and 1 of them can't be ignored.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.