The Hunan Zhenghong Science and Technology Develop Co.,Ltd. (SZSE:000702) share price has done very well over the last month, posting an excellent gain of 65%. Looking back a bit further, it's encouraging to see the stock is up 51% in the last year.

After such a large jump in price, when almost half of the companies in China's Food industry have price-to-sales ratios (or "P/S") below 1.9x, you may consider Hunan Zhenghong Science and Technology DevelopLtd as a stock probably not worth researching with its 2.8x 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.

How Has Hunan Zhenghong Science and Technology DevelopLtd Performed Recently?

For instance, Hunan Zhenghong Science and Technology DevelopLtd's receding revenue in recent times would have to be some food for thought. 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.

What Are Revenue Growth Metrics Telling Us About The High P/S?

Hunan Zhenghong Science and Technology DevelopLtd's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than 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 13%. The last three years don't look nice either as the company has shrunk revenue by 22% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 16% shows it's an unpleasant look.

With this information, we find it concerning that Hunan Zhenghong Science and Technology DevelopLtd is trading at a P/S higher than the industry. 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

Hunan Zhenghong Science and Technology DevelopLtd's P/S is on the rise since its shares have risen strongly. 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 Hunan Zhenghong Science and Technology DevelopLtd 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. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. 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.

You should always think about risks. Case in point, we've spotted 2 warning signs for Hunan Zhenghong Science and Technology DevelopLtd you should be aware of, and 1 of them doesn't sit too well with us.

If these risks are making you reconsider your opinion on Hunan Zhenghong Science and Technology DevelopLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.