Leadway Technology Investment Group Limited's (HKG:2086) 30% Share Price Surge Not Quite Adding Up

Leadway Technology Investment Group Limited (HKG:2086) shares have continued their recent momentum with a 30% gain in the last month alone. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 9.1% in the last twelve months.

Since its price has surged higher, you could be forgiven for thinking Leadway Technology Investment Group is a stock not worth researching with a price-to-sales ratios (or "P/S") of 1.9x, considering almost half the companies in Hong Kong's Tech industry have P/S ratios below 0.4x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

Check out our latest analysis for Leadway Technology Investment Group

How Leadway Technology Investment Group Has Been Performing

Revenue has risen firmly for Leadway Technology Investment Group recently, which is pleasing to see. Perhaps the market is expecting this decent revenue performance to beat out the industry over the near term, which has kept the P/S propped up. 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?

The only time you'd be truly comfortable seeing a P/S as high as Leadway Technology Investment Group's is when the company's growth is on track to outshine the industry.

Retrospectively, the last year delivered an exceptional 27% gain to the company's top line. Still, revenue has barely risen at all from three years ago in total, which is not ideal. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 17% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

In light of this, it's alarming that Leadway Technology Investment Group's P/S sits above the majority of other companies. 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 good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What Does Leadway Technology Investment Group's P/S Mean For Investors?

The large bounce in Leadway Technology Investment Group's shares has lifted the company's P/S handsomely. 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.

The fact that Leadway Technology Investment Group currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Before you take the next step, you should know about the 2 warning signs for Leadway Technology Investment Group (1 makes us a bit uncomfortable!) that we have uncovered.

If these risks are making you reconsider your opinion on Leadway Technology Investment Group, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.