Subdued Growth No Barrier To Chung Hwa Chemical Industrial Works, Ltd. (TWSE:1727) With Shares Advancing 26%

The Chung Hwa Chemical Industrial Works, Ltd. (TWSE:1727) share price has done very well over the last month, posting an excellent gain of 26%. Unfortunately, despite the strong performance over the last month, the full year gain of 9.8% isn't as attractive.

Since its price has surged higher, when almost half of the companies in Taiwan's Chemicals industry have price-to-sales ratios (or "P/S") below 1.9x, you may consider Chung Hwa Chemical Industrial Works as a stock probably not worth researching with its 2.6x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

See our latest analysis for Chung Hwa Chemical Industrial Works

How Has Chung Hwa Chemical Industrial Works Performed Recently?

As an illustration, revenue has deteriorated at Chung Hwa Chemical Industrial Works over the last year, which is not ideal at all. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. 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 Chung Hwa Chemical Industrial Works, 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 Chung Hwa Chemical Industrial Works?

The only time you'd be truly comfortable seeing a P/S as high as Chung Hwa Chemical Industrial Works' is when the company's growth is on track to outshine the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 19%. Unfortunately, that's brought it right back to where it started three years ago with revenue growth being virtually non-existent overall during that time. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 7.3% shows it's noticeably less attractive.

With this information, we find it concerning that Chung Hwa Chemical Industrial Works is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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 Chung Hwa Chemical Industrial Works' P/S

Chung Hwa Chemical Industrial Works' P/S is on the rise since its shares have risen strongly. 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 Chung Hwa Chemical Industrial Works revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Chung Hwa Chemical Industrial Works (at least 1 which doesn't sit too well with us), and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com