Yarward Electronics (Shandong) Co., Ltd. (SZSE:301337) shareholders have had their patience rewarded with a 47% share price jump in the last month. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.
After such a large jump in price, given around half the companies in China's Healthcare Services industry have price-to-sales ratios (or "P/S") below 8.4x, you may consider Yarward Electronics (Shandong) as a stock to avoid entirely with its 13.5x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.
View our latest analysis for Yarward Electronics (Shandong)
How Yarward Electronics (Shandong) Has Been Performing
Revenue has risen firmly for Yarward Electronics (Shandong) recently, which is pleasing to see. 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. If not, then existing shareholders may be a little nervous about the viability of the share price.
Do Revenue Forecasts Match The High P/S Ratio?
The only time you'd be truly comfortable seeing a P/S as steep as Yarward Electronics (Shandong)'s is when the company's growth is on track to outshine the industry decidedly.
If we review the last year of revenue growth, the company posted a worthy increase of 14%. The latest three year period has also seen an excellent 55% overall rise in revenue, aided somewhat by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.
Comparing that to the industry, which is predicted to deliver 39% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.
In light of this, it's alarming that Yarward Electronics (Shandong)'s P/S sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.
The Bottom Line On Yarward Electronics (Shandong)'s P/S
Shares in Yarward Electronics (Shandong) have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.
The fact that Yarward Electronics (Shandong) currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.
Before you settle on your opinion, we've discovered 4 warning signs for Yarward Electronics (Shandong) (2 are concerning!) 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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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.
