Despite an already strong run, Hubei Zhongyi Technology Inc. (SZSE:301150) shares have been powering on, with a gain of 31% in the last thirty days. 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.

In spite of the firm bounce in price, Hubei Zhongyi Technology's price-to-sales (or "P/S") ratio of 1x might still make it look like a strong buy right now compared to the wider Electronic industry in China, where around half of the companies have P/S ratios above 4.5x and even P/S above 9x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

How Has Hubei Zhongyi Technology Performed Recently?

With revenue growth that's exceedingly strong of late, Hubei Zhongyi Technology has been doing very well. One possibility is that the P/S ratio is low because investors think this strong revenue growth might actually underperform 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 Hubei Zhongyi Technology's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as depressed as Hubei Zhongyi Technology's is when the company's growth is on track to lag the industry decidedly.

If we review the last year of revenue growth, the company posted a terrific increase of 36%. Pleasingly, revenue has also lifted 137% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenue over that time.

When compared to the industry's one-year growth forecast of 27%, the most recent medium-term revenue trajectory is noticeably more alluring

With this in mind, we find it intriguing that Hubei Zhongyi Technology's P/S isn't as high compared to that of its industry peers. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Bottom Line On Hubei Zhongyi Technology's P/S

Shares in Hubei Zhongyi Technology have risen appreciably however, its P/S is still subdued. 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.

We're very surprised to see Hubei Zhongyi Technology currently trading on a much lower than expected P/S since its recent three-year growth is higher than the wider industry forecast. When we see strong revenue with faster-than-industry growth, we assume there are some significant underlying risks to the company's ability to make money which is applying downwards pressure on the P/S ratio. While recent revenue trends over the past medium-term suggest that the risk of a price decline is low, investors appear to perceive a likelihood of revenue fluctuations in the future.

You should always think about risks. Case in point, we've spotted 2 warning signs for Hubei Zhongyi Technology you should be aware of, and 1 of them makes us a bit uncomfortable.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.