Revenues Not Telling The Story For Wuhan Lincontrol Automotive Electronics Co., Ltd. (SHSE:688667) After Shares Rise 50%

Wuhan Lincontrol Automotive Electronics Co., Ltd. (SHSE:688667) shares have had a really impressive month, gaining 50% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 45% over that time.

Although its price has surged higher, you could still be forgiven for feeling indifferent about Wuhan Lincontrol Automotive Electronics' P/S ratio of 2.3x, since the median price-to-sales (or "P/S") ratio for the Auto Components industry in China is also close to 2.2x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Check out our latest analysis for Wuhan Lincontrol Automotive Electronics

What Does Wuhan Lincontrol Automotive Electronics' Recent Performance Look Like?

Recent times have been quite advantageous for Wuhan Lincontrol Automotive Electronics as its revenue has been rising very briskly. The P/S is probably moderate because investors think this strong revenue growth might not be enough to outperform the broader industry in the near future. 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 not quite in favour.

Although there are no analyst estimates available for Wuhan Lincontrol Automotive Electronics, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Wuhan Lincontrol Automotive Electronics' Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Wuhan Lincontrol Automotive Electronics' to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 30%. As a result, it also grew revenue by 24% in total over the last three years. Accordingly, shareholders would have probably been satisfied with 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 momentum is weaker, based on recent medium-term annualised revenue results.

With this information, we find it interesting that Wuhan Lincontrol Automotive Electronics is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

The Key Takeaway

Wuhan Lincontrol Automotive Electronics appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry 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 examination of Wuhan Lincontrol Automotive Electronics revealed its poor three-year revenue trends aren't resulting in a lower P/S as per our expectations, given they look worse than current industry outlook. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. Unless the recent medium-term conditions improve, it's hard to accept the current share price as fair value.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 5 warning signs with Wuhan Lincontrol Automotive Electronics (at least 1 which is concerning), and understanding these should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.