Highbroad Advanced Material (Hefei) Co., Ltd. (SZSE:301321) shares have continued their recent momentum with a 33% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 25% in the last year.

In spite of the firm bounce in price, Highbroad Advanced Material (Hefei) may still look like a strong buying opportunity at present with its price-to-sales (or "P/S") ratio of 1.6x, considering almost half of all companies in the Semiconductor industry in China have P/S ratios greater than 7.2x and even P/S higher than 13x 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 limited.

How Has Highbroad Advanced Material (Hefei) Performed Recently?

Highbroad Advanced Material (Hefei) has been doing a good job lately as it's been growing revenue at a solid pace. One possibility is that the P/S is low because investors think this respectable revenue growth might actually underperform the broader industry in the near future. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

Is There Any Revenue Growth Forecasted For Highbroad Advanced Material (Hefei)?

In order to justify its P/S ratio, Highbroad Advanced Material (Hefei) would need to produce anemic growth that's substantially trailing the industry.

Taking a look back first, we see that the company grew revenue by an impressive 17% last year. However, this wasn't enough as the latest three year period has seen the company endure a nasty 20% drop in revenue in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 38% shows it's an unpleasant look.

In light of this, it's understandable that Highbroad Advanced Material (Hefei)'s P/S would sit below the majority of other companies. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Final Word

Shares in Highbroad Advanced Material (Hefei) have risen appreciably however, its P/S is still subdued. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Highbroad Advanced Material (Hefei) revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Plus, you should also learn about these 3 warning signs we've spotted with Highbroad Advanced Material (Hefei).

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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