Despite an already strong run, Harbin Electric Company Limited (HKG:1133) shares have been powering on, with a gain of 27% in the last thirty days. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 27% in the last twelve months.

In spite of the firm bounce in price, it's still not a stretch to say that Harbin Electric's price-to-sales (or "P/S") ratio of 0.2x right now seems quite "middle-of-the-road" compared to the Electrical industry in Hong Kong, where the median P/S ratio is around 0.4x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

What Does Harbin Electric's P/S Mean For Shareholders?

Recent revenue growth for Harbin Electric has been in line with the industry. It seems that many are expecting the mediocre revenue performance to persist, which has held the P/S ratio back. If you like the company, you'd be hoping this can at least be maintained so that you could pick up some stock while it's not quite in favour.

Is There Some Revenue Growth Forecasted For Harbin Electric?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Harbin Electric's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 25% gain to the company's top line. As a result, it also grew revenue by 19% 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.

Turning to the outlook, the next three years should generate growth of 18% each year as estimated by the two analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 18% per annum, which is not materially different.

With this in mind, it makes sense that Harbin Electric's P/S is closely matching its industry peers. It seems most investors are expecting to see average future growth and are only willing to pay a moderate amount for the stock.

What Does Harbin Electric's P/S Mean For Investors?

Harbin Electric appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've seen that Harbin Electric maintains an adequate P/S seeing as its revenue growth figures match the rest of the industry. Right now shareholders are comfortable with the P/S as they are quite confident future revenue won't throw up any surprises. All things considered, if the P/S and revenue estimates contain no major shocks, then it's hard to see the share price moving strongly in either direction in the near future.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Harbin Electric that you should be aware 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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