Shenzhen Soling Industrial Co.,Ltd's (SZSE:002766) Shares Climb 27% But Its Business Is Yet to Catch Up

Shenzhen Soling Industrial Co.,Ltd (SZSE:002766) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 16% over that time.

Since its price has surged higher, you could be forgiven for thinking Shenzhen Soling IndustrialLtd is a stock not worth researching with a price-to-sales ratios (or "P/S") of 3.1x, considering almost half the companies in China's Auto Components industry have P/S ratios below 1.9x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Shenzhen Soling IndustrialLtd

How Has Shenzhen Soling IndustrialLtd Performed Recently?

Shenzhen Soling IndustrialLtd certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. The P/S ratio is probably high because investors think this strong revenue growth will be enough to outperform the broader industry in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Shenzhen Soling IndustrialLtd's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Shenzhen Soling IndustrialLtd?

The only time you'd be truly comfortable seeing a P/S as high as Shenzhen Soling IndustrialLtd's is when the company's growth is on track to outshine the industry.

Retrospectively, the last year delivered an exceptional 60% gain to the company's top line. The latest three year period has also seen a 27% overall rise in revenue, aided extensively by its short-term performance. 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 25% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this in mind, we find it worrying that Shenzhen Soling IndustrialLtd's P/S exceeds that of its industry peers. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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.

What We Can Learn From Shenzhen Soling IndustrialLtd's P/S?

Shenzhen Soling IndustrialLtd shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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 Shenzhen Soling IndustrialLtd 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 the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Shenzhen Soling IndustrialLtd that you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.

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