Despite an already strong run, Lanzhou GreatWall Electrical Co., Ltd (SHSE:600192) shares have been powering on, with a gain of 37% in the last thirty days. Taking a wider view, although not as strong as the last month, the full year gain of 10% is also fairly reasonable.

Although its price has surged higher, Lanzhou GreatWall Electrical's price-to-sales (or "P/S") ratio of 1.5x might still make it look like a buy right now compared to the Electrical industry in China, where around half of the companies have P/S ratios above 2.4x and even P/S above 5x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

How Lanzhou GreatWall Electrical Has Been Performing

For example, consider that Lanzhou GreatWall Electrical's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Is There Any Revenue Growth Forecasted For Lanzhou GreatWall Electrical?

In order to justify its P/S ratio, Lanzhou GreatWall Electrical would need to produce sluggish growth that's trailing the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 18%. This means it has also seen a slide in revenue over the longer-term as revenue is down 14% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 23% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we understand why Lanzhou GreatWall Electrical's P/S is lower than most of its industry peers. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

What We Can Learn From Lanzhou GreatWall Electrical's P/S?

Lanzhou GreatWall Electrical's stock price has surged recently, but its but its P/S still remains modest. 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.

As we suspected, our examination of Lanzhou GreatWall Electrical revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. Given the current circumstances, it seems unlikely that the share price will experience any significant movement in either direction in the near future if recent medium-term revenue trends persist.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Lanzhou GreatWall Electrical (at least 1 which is a bit unpleasant), and understanding these should be part of your investment process.

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

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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.