Shang Gong Group Co., Ltd.'s (SHSE:600843) Shares Bounce 25% But Its Business Still Trails The Industry

Those holding Shang Gong Group Co., Ltd. (SHSE:600843) shares would be relieved that the share price has rebounded 25% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. The last month tops off a massive increase of 205% in the last year.

In spite of the firm bounce in price, Shang Gong Group's price-to-sales (or "P/S") ratio of 2.2x might still make it look like a buy right now compared to the Machinery industry in China, where around half of the companies have P/S ratios above 3.4x and even P/S above 6x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

See our latest analysis for Shang Gong Group

How Shang Gong Group Has Been Performing

Shang Gong Group has been doing a good job lately as it's been growing revenue at a solid pace. It might be that many expect the respectable revenue performance to degrade substantially, which has repressed the P/S. Those who are bullish on Shang Gong Group will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

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

Do Revenue Forecasts Match The Low P/S Ratio?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Shang Gong Group's to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 21% last year. The strong recent performance means it was also able to grow revenue by 47% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

This is in contrast to the rest of the industry, which is expected to grow by 22% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in consideration, it's easy to understand why Shang Gong Group's P/S falls short of the mark set by its industry peers. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Bottom Line On Shang Gong Group's P/S

The latest share price surge wasn't enough to lift Shang Gong Group's P/S close to the industry median. 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 Shang Gong Group confirms that the company's revenue trends over the past three-year years are a key factor in its low price-to-sales ratio, as we suspected, given they fall short of current industry expectations. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

It is also worth noting that we have found 2 warning signs for Shang Gong Group (1 is a bit unpleasant!) that you need to take into consideration.

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.