Despite an already strong run, HNA Technology Co.,Ltd. (SHSE:600751) shares have been powering on, with a gain of 26% in the last thirty days. Unfortunately, despite the strong performance over the last month, the full year gain of 7.7% isn't as attractive.

Following the firm bounce in price, HNA TechnologyLtd may be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 7.6x, since almost half of all companies in the Electronic industry in China have P/S ratios under 4.5x and even P/S lower than 2x are not unusual. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

What Does HNA TechnologyLtd's P/S Mean For Shareholders?

Recent times have been quite advantageous for HNA TechnologyLtd as its revenue has been rising very briskly. It seems that many are expecting the strong revenue performance to beat most other companies over the coming period, which has increased investors' willingness to pay up for the stock. 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?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like HNA TechnologyLtd's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 224% gain to the company's top line. However, this wasn't enough as the latest three year period has seen the company endure a nasty 100% drop in revenue in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

Comparing that to the industry, which is predicted to deliver 27% 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 find it worrying that HNA TechnologyLtd'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.

The Final Word

HNA TechnologyLtd's P/S has grown nicely over the last month thanks to a handy boost in the share price. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that HNA TechnologyLtd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. 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. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

Before you settle on your opinion, we've discovered 1 warning sign for HNA TechnologyLtd that you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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