What Huaiji Dengyun Auto-parts (Holding) Co.,Ltd.'s (SZSE:002715) 37% Share Price Gain Is Not Telling You

Simply Wall St · 10/18 22:36

Huaiji Dengyun Auto-parts (Holding) Co.,Ltd. (SZSE:002715) shareholders would be excited to see that the share price has had a great month, posting a 37% gain and recovering from prior weakness. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 8.4% over the last year.

Since its price has surged higher, given close to half the companies operating in China's Auto Components industry have price-to-sales ratios (or "P/S") below 2.1x, you may consider Huaiji Dengyun Auto-parts (Holding)Ltd as a stock to potentially avoid with its 3.4x 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 Huaiji Dengyun Auto-parts (Holding)Ltd

ps-multiple-vs-industry
SZSE:002715 Price to Sales Ratio vs Industry October 18th 2024

What Does Huaiji Dengyun Auto-parts (Holding)Ltd's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Huaiji Dengyun Auto-parts (Holding)Ltd over the last year, which is not ideal at all. One possibility is that the P/S is high because investors think the company will still do 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.

Although there are no analyst estimates available for Huaiji Dengyun Auto-parts (Holding)Ltd, 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 Huaiji Dengyun Auto-parts (Holding)Ltd?

The only time you'd be truly comfortable seeing a P/S as high as Huaiji Dengyun Auto-parts (Holding)Ltd's is when the company's growth is on track to outshine the industry.

Retrospectively, the last year delivered a frustrating 4.4% decrease to the company's top line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 18% overall rise in revenue. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 23% shows it's noticeably less attractive.

In light of this, it's alarming that Huaiji Dengyun Auto-parts (Holding)Ltd's P/S sits above the majority of other companies. 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.

What Does Huaiji Dengyun Auto-parts (Holding)Ltd's P/S Mean For Investors?

The large bounce in Huaiji Dengyun Auto-parts (Holding)Ltd'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 Huaiji Dengyun Auto-parts (Holding)Ltd 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.

Before you take the next step, you should know about the 1 warning sign for Huaiji Dengyun Auto-parts (Holding)Ltd that we have uncovered.

If you're unsure about the strength of Huaiji Dengyun Auto-parts (Holding)Ltd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.