What Huayu Expressway Group Limited's (HKG:1823) 25% Share Price Gain Is Not Telling You

The Huayu Expressway Group Limited (HKG:1823) share price has done very well over the last month, posting an excellent gain of 25%. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 39% in the last twelve months.

After such a large jump in price, you could be forgiven for thinking Huayu Expressway Group is a stock not worth researching with a price-to-sales ratios (or "P/S") of 1x, considering almost half the companies in Hong Kong's Construction industry have P/S ratios below 0.3x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

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See our latest analysis for Huayu Expressway Group

How Huayu Expressway Group Has Been Performing

For instance, Huayu Expressway Group's receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is Huayu Expressway Group's Revenue Growth Trending?

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

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 51%. The last three years don't look nice either as the company has shrunk revenue by 71% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 16% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's alarming that Huayu Expressway Group's P/S sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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.

What Does Huayu Expressway Group's P/S Mean For Investors?

Huayu Expressway Group's P/S is on the rise since its shares have risen strongly. 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 Huayu Expressway Group 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 the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

It is also worth noting that we have found 2 warning signs for Huayu Expressway Group (1 is a bit unpleasant!) that you need to take into consideration.

If you're unsure about the strength of Huayu Expressway Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.