China Nature Energy Technology Holdings Limited (HKG:1597) shareholders would be excited to see that the share price has had a great month, posting a 67% gain and recovering from prior weakness. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 46% in the last twelve months.
Following the firm bounce in price, given around half the companies in Hong Kong's Electrical industry have price-to-sales ratios (or "P/S") below 0.6x, you may consider China Nature Energy Technology Holdings as a stock to avoid entirely with its 5.5x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.
Check out our latest analysis for China Nature Energy Technology Holdings
How China Nature Energy Technology Holdings Has Been Performing
As an illustration, revenue has deteriorated at China Nature Energy Technology Holdings over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.
We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on China Nature Energy Technology Holdings' earnings, revenue and cash flow.What Are Revenue Growth Metrics Telling Us About The High P/S?
The only time you'd be truly comfortable seeing a P/S as steep as China Nature Energy Technology Holdings' is when the company's growth is on track to outshine the industry decidedly.
Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 18%. As a result, revenue from three years ago have also fallen 37% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.
In contrast to the company, the rest of the industry is expected to grow by 19% over the next year, which really puts the company's recent medium-term revenue decline into perspective.
With this in mind, we find it worrying that China Nature Energy Technology Holdings' 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. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.
What Does China Nature Energy Technology Holdings' P/S Mean For Investors?
The strong share price surge has lead to China Nature Energy Technology Holdings' P/S soaring as well. 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 China Nature Energy Technology Holdings currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.
Before you take the next step, you should know about the 2 warning signs for China Nature Energy Technology Holdings (1 is a bit unpleasant!) that we have uncovered.
If these risks are making you reconsider your opinion on China Nature Energy Technology Holdings, explore our interactive list of high quality stocks to get an idea of what else is out there.
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