Zhuhai Huajin Capital Co., Ltd. (SZSE:000532) shares have continued their recent momentum with a 36% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 33%.

Following the firm bounce in price, Zhuhai Huajin Capital may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 13.3x, when you consider almost half of the companies in the Electronic industry in China have P/S ratios under 4.1x and even P/S lower than 2x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

See our latest analysis for Zhuhai Huajin Capital

What Does Zhuhai Huajin Capital's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Zhuhai Huajin Capital 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. However, if this isn't the case, investors might get caught out paying too much for the stock.

Is There Enough Revenue Growth Forecasted For Zhuhai Huajin Capital?

In order to justify its P/S ratio, Zhuhai Huajin Capital would need to produce outstanding growth that's well in excess of the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 48%. The last three years don't look nice either as the company has shrunk revenue by 18% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 61% shows it's an unpleasant look.

In light of this, it's alarming that Zhuhai Huajin Capital's P/S sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

The strong share price surge has lead to Zhuhai Huajin Capital's P/S soaring as well. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Zhuhai Huajin Capital revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

Before you take the next step, you should know about the 3 warning signs for Zhuhai Huajin Capital that we have uncovered.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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