Subdued Growth No Barrier To Shanghai Hugong Electric Group Co.,Ltd. (SHSE:603131) With Shares Advancing 26%

Despite an already strong run, Shanghai Hugong Electric Group Co.,Ltd. (SHSE:603131) shares have been powering on, with a gain of 26% in the last thirty days. Taking a wider view, although not as strong as the last month, the full year gain of 13% is also fairly reasonable.

Following the firm bounce in price, you could be forgiven for thinking Shanghai Hugong Electric GroupLtd is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 5.6x, considering almost half the companies in China's Machinery industry have P/S ratios below 3.1x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

View our latest analysis for Shanghai Hugong Electric GroupLtd

How Shanghai Hugong Electric GroupLtd Has Been Performing

The revenue growth achieved at Shanghai Hugong Electric GroupLtd over the last year would be more than acceptable for most companies. Perhaps the market is expecting this decent revenue performance to beat out the industry over the near term, which has kept the P/S propped up. 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.

How Is Shanghai Hugong Electric GroupLtd's Revenue Growth Trending?

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

Taking a look back first, we see that the company grew revenue by an impressive 18% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 16% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 25% shows it's an unpleasant look.

In light of this, it's alarming that Shanghai Hugong Electric GroupLtd'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. 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.

The Key Takeaway

The strong share price surge has lead to Shanghai Hugong Electric GroupLtd's P/S soaring as well. 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. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Before you take the next step, you should know about the 1 warning sign for Shanghai Hugong Electric GroupLtd that we have uncovered.

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.

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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.