Hangzhou Huaxing Chuangye Communication Technology Co., Ltd. (SZSE:300025) shares have had a horrible month, losing 25% after a relatively good period beforehand. Looking at the bigger picture, even after this poor month the stock is up 30% in the last year.

Although its price has dipped substantially, when almost half of the companies in China's Telecom industry have price-to-sales ratios (or "P/S") below 3.3x, you may still consider Hangzhou Huaxing Chuangye Communication Technology as a stock probably not worth researching with its 5.1x 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.

What Does Hangzhou Huaxing Chuangye Communication Technology's P/S Mean For Shareholders?

It looks like revenue growth has deserted Hangzhou Huaxing Chuangye Communication Technology recently, which is not something to boast about. One possibility is that the P/S is high because investors think the benign revenue growth will improve to outperform the broader industry in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as high as Hangzhou Huaxing Chuangye Communication Technology's is when the company's growth is on track to outshine the industry.

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. This isn't what shareholders were looking for as it means they've been left with a 13% decline in revenue over the last three years in total. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 20% shows it's an unpleasant look.

With this in mind, we find it worrying that Hangzhou Huaxing Chuangye Communication Technology's P/S exceeds that of its industry peers. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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.

What We Can Learn From Hangzhou Huaxing Chuangye Communication Technology's P/S?

Despite the recent share price weakness, Hangzhou Huaxing Chuangye Communication Technology's P/S remains higher than most other companies in the industry. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our examination of Hangzhou Huaxing Chuangye Communication Technology 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 recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Hangzhou Huaxing Chuangye Communication Technology with six simple checks.

If you're unsure about the strength of Hangzhou Huaxing Chuangye Communication Technology'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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