Shandong Huifa Foodstuff Co.,Ltd. (SHSE:603536) shares have continued their recent momentum with a 26% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 31%.

Although its price has surged higher, Shandong Huifa FoodstuffLtd may still be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 1.3x, since almost half of all companies in the Food industry in China have P/S ratios greater than 1.9x and even P/S higher than 4x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

What Does Shandong Huifa FoodstuffLtd's Recent Performance Look Like?

Revenue has risen firmly for Shandong Huifa FoodstuffLtd recently, which is pleasing to see. 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.

How Is Shandong Huifa FoodstuffLtd's Revenue Growth Trending?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Shandong Huifa FoodstuffLtd's to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 13% last year. The latest three year period has also seen a 19% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 16% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Shandong Huifa FoodstuffLtd's P/S sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

What We Can Learn From Shandong Huifa FoodstuffLtd's P/S?

The latest share price surge wasn't enough to lift Shandong Huifa FoodstuffLtd's P/S close to the industry median. 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.

As we suspected, our examination of Shandong Huifa FoodstuffLtd revealed its three-year revenue trends are contributing to its low P/S, given they look worse than current industry expectations. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Shandong Huifa FoodstuffLtd (of which 1 can't be ignored!) you should know about.

If you're unsure about the strength of Shandong Huifa FoodstuffLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.