Sichuan Shudao Equipment & Technology Co.,Ltd. (SZSE:300540) shares have had a really impressive month, gaining 32% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 31%.
Since its price has surged higher, you could be forgiven for thinking Sichuan Shudao Equipment & TechnologyLtd is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 9.2x, considering almost half the companies in China's Machinery industry have P/S ratios below 2.9x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.
SZSE:300540 Price to Sales Ratio vs Industry March 19th 2024
How Sichuan Shudao Equipment & TechnologyLtd Has Been Performing
With revenue growth that's inferior to most other companies of late, Sichuan Shudao Equipment & TechnologyLtd has been relatively sluggish. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.
Keen to find out how analysts think Sichuan Shudao Equipment & TechnologyLtd's future stacks up against the industry? In that case, our free report is a great place to start.
Do Revenue Forecasts Match The High P/S Ratio?
There's an inherent assumption that a company should far outperform the industry for P/S ratios like Sichuan Shudao Equipment & TechnologyLtd's to be considered reasonable.
If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. Fortunately, a few good years before that means that it was still able to grow revenue by 9.4% in total over the last three years. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.
Shifting to the future, estimates from the one analyst covering the company suggest revenue should grow by 122% over the next year. Meanwhile, the rest of the industry is forecast to only expand by 28%, which is noticeably less attractive.
With this in mind, it's not hard to understand why Sichuan Shudao Equipment & TechnologyLtd's P/S is high relative to its industry peers. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Final Word
The strong share price surge has lead to Sichuan Shudao Equipment & TechnologyLtd's P/S soaring as well. 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 look into Sichuan Shudao Equipment & TechnologyLtd shows that its P/S ratio remains high on the merit of its strong future revenues. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.
Plus, you should also learn about this 1 warning sign we've spotted with Sichuan Shudao Equipment & TechnologyLtd.
It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).
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