Shanghai Hugong Electric Group Co.,Ltd. (SHSE:603131) Investors Are Less Pessimistic Than Expected

Shanghai Hugong Electric Group Co.,Ltd.'s (SHSE:603131) price-to-sales (or "P/S") ratio of 5.3x may not look like an appealing investment opportunity when you consider close to half the companies in the Machinery industry in China have P/S ratios below 3.4x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Shanghai Hugong Electric GroupLtd

What Does Shanghai Hugong Electric GroupLtd's P/S Mean For Shareholders?

The revenue growth achieved at Shanghai Hugong Electric GroupLtd 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

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

In order to justify its P/S ratio, Shanghai Hugong Electric GroupLtd 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 18%. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 16% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

In contrast to the company, the rest of the industry is expected to grow by 22% 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 Shanghai Hugong Electric GroupLtd's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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 Does Shanghai Hugong Electric GroupLtd's P/S Mean For Investors?

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 Shanghai Hugong Electric GroupLtd 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. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Shanghai Hugong Electric GroupLtd that you need to be mindful of.

If these risks are making you reconsider your opinion on Shanghai Hugong Electric GroupLtd, 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.