Suzhou Industrial Park Heshun Electric Co., Ltd. (SZSE:300141) shareholders that were waiting for something to happen have been dealt a blow with a 27% share price drop in the last month. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 16% in that time.
Even after such a large drop in price, given around half the companies in China's Electrical industry have price-to-sales ratios (or "P/S") below 2.1x, you may still consider Suzhou Industrial Park Heshun Electric as a stock to avoid entirely with its 4.9x 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 Suzhou Industrial Park Heshun Electric
What Does Suzhou Industrial Park Heshun Electric's Recent Performance Look Like?
Recent times have been quite advantageous for Suzhou Industrial Park Heshun Electric as its revenue has been rising very briskly. Perhaps the market is expecting future revenue performance to outperform the wider market, which has seemingly got people interested in the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Do Revenue Forecasts Match The High P/S Ratio?
In order to justify its P/S ratio, Suzhou Industrial Park Heshun Electric would need to produce outstanding growth that's well in excess of the industry.
Taking a look back first, we see that the company grew revenue by an impressive 58% last year. The latest three year period has also seen a 22% overall rise in revenue, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing revenue over that time.
Comparing that to the industry, which is predicted to deliver 29% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.
With this information, we find it concerning that Suzhou Industrial Park Heshun Electric is trading at a P/S higher than the industry. 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 Suzhou Industrial Park Heshun Electric's P/S
A significant share price dive has done very little to deflate Suzhou Industrial Park Heshun Electric's very lofty P/S. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
The fact that Suzhou Industrial Park Heshun Electric 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 see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.
Before you settle on your opinion, we've discovered 1 warning sign for Suzhou Industrial Park Heshun 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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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.
