What Beijing Dynamic Power Co.,LTD's (SHSE:600405) 26% Share Price Gain Is Not Telling You

Despite an already strong run, Beijing Dynamic Power Co.,LTD (SHSE:600405) shares have been powering on, with a gain of 26% in the last thirty days. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 7.6% over the last year.

After such a large jump in price, you could be forgiven for thinking Beijing Dynamic PowerLTD is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 5.4x, considering almost half the companies in China's Electrical industry have P/S ratios below 2.5x. 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 Beijing Dynamic PowerLTD

What Does Beijing Dynamic PowerLTD's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Beijing Dynamic PowerLTD over the last year, which is not ideal at all. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. If not, then existing shareholders may be quite 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 Beijing Dynamic PowerLTD's earnings, revenue and cash flow.

How Is Beijing Dynamic PowerLTD's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Beijing Dynamic PowerLTD's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered a frustrating 40% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 43% in aggregate. Accordingly, shareholders would have felt downbeat about 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 downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's alarming that Beijing Dynamic PowerLTD's P/S sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What We Can Learn From Beijing Dynamic PowerLTD's P/S?

Beijing Dynamic PowerLTD's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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 established that Beijing Dynamic PowerLTD currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Beijing Dynamic PowerLTD (1 is a bit concerning!) that you need to be mindful of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.