Hua Lien International (Holding) Company Limited (HKG:969) Stock Rockets 65% As Investors Are Less Pessimistic Than Expected

Despite an already strong run, Hua Lien International (Holding) Company Limited (HKG:969) shares have been powering on, with a gain of 65% in the last thirty days. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 7.8% in the last twelve months.

Since its price has surged higher, when almost half of the companies in Hong Kong's Food industry have price-to-sales ratios (or "P/S") below 0.6x, you may consider Hua Lien International (Holding) as a stock probably not worth researching with its 2.1x P/S ratio. 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.

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Check out our latest analysis for Hua Lien International (Holding)

How Has Hua Lien International (Holding) Performed Recently?

Hua Lien International (Holding) has been doing a decent job lately as it's been growing revenue at a reasonable pace. One possibility is that the P/S ratio is high because investors think this good revenue growth will be enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

How Is Hua Lien International (Holding)'s Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as high as Hua Lien International (Holding)'s is when the company's growth is on track to outshine the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 3.5% last year. The solid recent performance means it was also able to grow revenue by 8.6% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Weighing that recent medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 4.3% shows it's about the same on an annualised basis.

In light of this, it's curious that Hua Lien International (Holding)'s P/S sits above the majority of other companies. Apparently many investors in the company are more bullish than recent times would indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as a continuation of recent revenue trends would weigh down the share price eventually.

The Bottom Line On Hua Lien International (Holding)'s P/S

The large bounce in Hua Lien International (Holding)'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.

Our examination of Hua Lien International (Holding) revealed its three-year revenue trends aren't impacting its high P/S as much as we would have predicted, given they look similar to current industry expectations. When we see average revenue with industry-like growth combined with a high P/S, we suspect the share price is at risk of declining, bringing the P/S back in line with the industry too. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You should always think about risks. Case in point, we've spotted 4 warning signs for Hua Lien International (Holding) you should be aware of, and 3 of them are concerning.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.