Optimistic Investors Push Hengxin Technology Ltd. (HKG:1085) Shares Up 26% But Growth Is Lacking

Hengxin Technology Ltd. (HKG:1085) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 34% in the last year.

Although its price has surged higher, you could still be forgiven for feeling indifferent about Hengxin Technology's P/S ratio of 0.3x, since the median price-to-sales (or "P/S") ratio for the Communications industry in Hong Kong is also close to 0.7x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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View our latest analysis for Hengxin Technology

What Does Hengxin Technology's P/S Mean For Shareholders?

Revenue has risen at a steady rate over the last year for Hengxin Technology, which is generally not a bad outcome. One possibility is that the P/S is moderate because investors think this good revenue growth might only be parallel to 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 not quite in favour.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Hengxin Technology will help you shine a light on its historical performance.

Is There Some Revenue Growth Forecasted For Hengxin Technology?

The only time you'd be comfortable seeing a P/S like Hengxin Technology's is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered a decent 5.4% gain to the company's revenues. Revenue has also lifted 14% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

This is in contrast to the rest of the industry, which is expected to grow by 52% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's curious that Hengxin Technology's P/S sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

The Key Takeaway

Its shares have lifted substantially and now Hengxin Technology's P/S is back within range of the industry median. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Hengxin Technology's average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. If recent medium-term revenue trends continue, the probability of a share price decline will become quite substantial, placing shareholders at risk.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Hengxin Technology (1 is concerning!) that you need to be mindful 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.