Jiangsu HHCK Advanced Materials Co.,Ltd (SHSE:688535) shareholders would be excited to see that the share price has had a great month, posting a 48% gain and recovering from prior weakness. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

Since its price has surged higher, Jiangsu HHCK Advanced MaterialsLtd may be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 18.8x, since almost half of all companies in the Semiconductor industry in China have P/S ratios under 6.8x and even P/S lower than 3x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

What Does Jiangsu HHCK Advanced MaterialsLtd's P/S Mean For Shareholders?

Jiangsu HHCK Advanced MaterialsLtd could be doing better as it's been growing revenue less than most other companies lately. One possibility is that the P/S ratio is high because investors think this lacklustre revenue performance will improve markedly. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

In order to justify its P/S ratio, Jiangsu HHCK Advanced MaterialsLtd would need to produce outstanding growth that's well in excess of the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 6.9%. Still, lamentably revenue has fallen 8.3% in aggregate from three years ago, which is disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 27% as estimated by the lone analyst watching the company. That's shaping up to be materially lower than the 38% growth forecast for the broader industry.

With this information, we find it concerning that Jiangsu HHCK Advanced MaterialsLtd is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Final Word

Shares in Jiangsu HHCK Advanced MaterialsLtd have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

We've concluded that Jiangsu HHCK Advanced MaterialsLtd currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Jiangsu HHCK Advanced MaterialsLtd that you should be aware of.

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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