Optimistic Investors Push Guangdong Huafeng New Energy Technology Co.,Ltd. (SZSE:002806) Shares Up 33% But Growth Is Lacking

Simply Wall St · 10/18 22:33

Guangdong Huafeng New Energy Technology Co.,Ltd. (SZSE:002806) shareholders would be excited to see that the share price has had a great month, posting a 33% gain and recovering from prior weakness. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Guangdong Huafeng New Energy TechnologyLtd's P/S ratio of 2.5x, since the median price-to-sales (or "P/S") ratio for the Electrical industry in China is also close to 2.2x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

See our latest analysis for Guangdong Huafeng New Energy TechnologyLtd

ps-multiple-vs-industry
SZSE:002806 Price to Sales Ratio vs Industry October 18th 2024

What Does Guangdong Huafeng New Energy TechnologyLtd's Recent Performance Look Like?

Revenue has risen firmly for Guangdong Huafeng New Energy TechnologyLtd recently, which is pleasing to see. Perhaps the market is expecting future revenue performance to only keep up with the broader industry, which has keeping the P/S in line with expectations. If that doesn't eventuate, then existing shareholders probably aren't too pessimistic about the future direction of the share price.

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

Do Revenue Forecasts Match The P/S Ratio?

In order to justify its P/S ratio, Guangdong Huafeng New Energy TechnologyLtd would need to produce growth that's similar to the industry.

Taking a look back first, we see that the company grew revenue by an impressive 26% last year. The latest three year period has also seen an excellent 50% overall rise in revenue, aided by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

This is in contrast to the rest of the industry, which is expected to grow by 23% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it interesting that Guangdong Huafeng New Energy TechnologyLtd is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

The Final Word

Guangdong Huafeng New Energy TechnologyLtd's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that Guangdong Huafeng New Energy TechnologyLtd's average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. Right now we are uncomfortable with the P/S as this revenue performance isn't likely to support a more positive sentiment for long. Unless the recent medium-term conditions improve, it's hard to accept the current share price as fair value.

Plus, you should also learn about these 3 warning signs we've spotted with Guangdong Huafeng New Energy TechnologyLtd (including 2 which can't be ignored).

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).