Chongqing Zongshen Power Machinery Co.,Ltd's (SZSE:001696) 32% Share Price Surge Not Quite Adding Up

Chongqing Zongshen Power Machinery Co.,Ltd (SZSE:001696) shares have had a really impressive month, gaining 32% after a shaky period beforehand. This latest share price bounce rounds out a remarkable 398% gain over the last twelve months.

After such a large jump in price, when almost half of the companies in China's Auto Components industry have price-to-sales ratios (or "P/S") below 2.6x, you may consider Chongqing Zongshen Power MachineryLtd as a stock probably not worth researching with its 3.3x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

Check out our latest analysis for Chongqing Zongshen Power MachineryLtd

How Chongqing Zongshen Power MachineryLtd Has Been Performing

Chongqing Zongshen Power MachineryLtd certainly has been doing a good job lately as it's been growing revenue more than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Chongqing Zongshen Power MachineryLtd.

What Are Revenue Growth Metrics Telling Us About The High P/S?

In order to justify its P/S ratio, Chongqing Zongshen Power MachineryLtd would need to produce impressive growth in excess of the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 27%. Although, its longer-term performance hasn't been as strong with three-year revenue growth being relatively non-existent overall. 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 sole analyst covering the company suggest revenue should grow by 16% over the next year. With the industry predicted to deliver 25% growth, the company is positioned for a weaker revenue result.

With this information, we find it concerning that Chongqing Zongshen Power MachineryLtd is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

What Does Chongqing Zongshen Power MachineryLtd's P/S Mean For Investors?

Chongqing Zongshen Power MachineryLtd's P/S is on the rise since its shares have risen strongly. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've concluded that Chongqing Zongshen Power MachineryLtd currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Chongqing Zongshen Power MachineryLtd 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.