Hygon Information Technology Co., Ltd. (SHSE:688041) shareholders have had their patience rewarded with a 46% share price jump in the last month. The annual gain comes to 105% following the latest surge, making investors sit up and take notice.

After such a large jump in price, Hygon Information Technology may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 32.2x, when you consider almost half of the companies in the Semiconductor industry in China have P/S ratios under 6.3x and even P/S lower than 3x aren't out of the ordinary. 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 Hygon Information Technology's Recent Performance Look Like?

With revenue growth that's superior to most other companies of late, Hygon Information Technology has been doing relatively well. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Is There Enough Revenue Growth Forecasted For Hygon Information Technology?

The only time you'd be truly comfortable seeing a P/S as steep as Hygon Information Technology's is when the company's growth is on track to outshine the industry decidedly.

If we review the last year of revenue growth, the company posted a terrific increase of 56%. The latest three year period has also seen an excellent 255% overall rise in revenue, aided by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 35% as estimated by the analysts watching the company. That's shaping up to be similar to the 37% growth forecast for the broader industry.

With this information, we find it interesting that Hygon Information Technology is trading at a high P/S compared to the industry. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

What Does Hygon Information Technology's P/S Mean For Investors?

Shares in Hygon Information Technology have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

Given Hygon Information Technology's future revenue forecasts are in line with the wider industry, the fact that it trades at an elevated P/S is somewhat surprising. Right now we are uncomfortable with the relatively high share price as the predicted future revenues aren't likely to support such positive sentiment for long. A positive change is needed in order to justify the current price-to-sales ratio.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Hygon Information Technology 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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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.