Baoding Tianwei Baobian Electric Co.,Ltd. (SHSE:600550) shares have continued their recent momentum with a 32% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 41%.

After such a large jump in price, when almost half of the companies in China's Electrical industry have price-to-sales ratios (or "P/S") below 1.9x, you may consider Baoding Tianwei Baobian ElectricLtd as a stock probably not worth researching with its 3x 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.

What Does Baoding Tianwei Baobian ElectricLtd's Recent Performance Look Like?

The revenue growth achieved at Baoding Tianwei Baobian ElectricLtd over the last year would be more than acceptable for most companies. It might be that many expect the respectable revenue performance to beat most other companies over the coming period, which has increased investors' willingness to pay up for the stock. However, if this isn't the case, investors might get caught out paying too much for the stock.

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Baoding Tianwei Baobian ElectricLtd's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 20% gain to the company's top line. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 1.4% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

Comparing that to the industry, which is predicted to deliver 24% 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 find it worrying that Baoding Tianwei Baobian ElectricLtd's P/S exceeds that of its industry peers. 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.

The Key Takeaway

Baoding Tianwei Baobian ElectricLtd's P/S is on the rise since its shares have risen strongly. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Baoding Tianwei Baobian ElectricLtd revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

You always need to take note of risks, for example - Baoding Tianwei Baobian ElectricLtd has 1 warning sign we think you should be aware of.

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.