Those holding Huizhou Speed Wireless Technology Co.,Ltd. (SZSE:300322) shares would be relieved that the share price has rebounded 29% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

Although its price has surged higher, Huizhou Speed Wireless TechnologyLtd's price-to-sales (or "P/S") ratio of 2.7x might still make it look like a buy right now compared to the Communications industry in China, where around half of the companies have P/S ratios above 4.5x and even P/S above 8x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

How Huizhou Speed Wireless TechnologyLtd Has Been Performing

For example, consider that Huizhou Speed Wireless TechnologyLtd's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is low because investors think the company won't do enough to avoid underperforming the broader industry in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

How Is Huizhou Speed Wireless TechnologyLtd's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as low as Huizhou Speed Wireless TechnologyLtd's is when the company's growth is on track to lag the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 5.5%. This means it has also seen a slide in revenue over the longer-term as revenue is down 11% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 51% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we understand why Huizhou Speed Wireless TechnologyLtd's P/S is lower than most of its industry peers. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

What We Can Learn From Huizhou Speed Wireless TechnologyLtd's P/S?

The latest share price surge wasn't enough to lift Huizhou Speed Wireless TechnologyLtd's P/S close to the industry median. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Huizhou Speed Wireless TechnologyLtd 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.

It is also worth noting that we have found 3 warning signs for Huizhou Speed Wireless TechnologyLtd that you need to take into consideration.

If these risks are making you reconsider your opinion on Huizhou Speed Wireless TechnologyLtd, 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.