What Baoding Tianwei Baobian Electric Co.,Ltd.'s (SHSE:600550) 32% Share Price Gain Is Not Telling You

Despite an already strong run, Baoding Tianwei Baobian Electric Co.,Ltd. (SHSE:600550) shares have been powering on, with a gain of 32% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 41% in the last year.

Following the firm bounce in price, given close to half the companies operating in China's Electrical industry have price-to-sales ratios (or "P/S") below 1.9x, you may consider Baoding Tianwei Baobian ElectricLtd as a stock to potentially avoid with its 3x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Baoding Tianwei Baobian ElectricLtd

How Has Baoding Tianwei Baobian ElectricLtd Performed Recently?

The revenue growth achieved at Baoding Tianwei Baobian ElectricLtd over the last year would be more than acceptable for most companies. It might be that many expect the respectable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. However, if this isn't the case, investors might get caught out paying too much for the stock.

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 Baoding Tianwei Baobian ElectricLtd's earnings, revenue and cash flow.

How Is Baoding Tianwei Baobian ElectricLtd's Revenue Growth Trending?

Baoding Tianwei Baobian ElectricLtd's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Retrospectively, the last year delivered an exceptional 20% gain to the company's top line. Still, revenue has fallen 1.4% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 24% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that Baoding Tianwei Baobian ElectricLtd'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. 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.

The Bottom Line On Baoding Tianwei Baobian ElectricLtd's P/S

Baoding Tianwei Baobian ElectricLtd shares have taken a big step in a northerly direction, but its P/S is elevated as a result. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Baoding Tianwei Baobian ElectricLtd revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. 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.

You should always think about risks. Case in point, we've spotted 1 warning sign for Baoding Tianwei Baobian ElectricLtd you should be aware of.

If these risks are making you reconsider your opinion on Baoding Tianwei Baobian ElectricLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.