Revenues Not Telling The Story For Zhejiang Tony Electronic Co., Ltd (SHSE:603595) After Shares Rise 36%

Zhejiang Tony Electronic Co., Ltd (SHSE:603595) shares have had a really impressive month, gaining 36% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 36% in the last twelve months.

Although its price has surged higher, it's still not a stretch to say that Zhejiang Tony Electronic's price-to-sales (or "P/S") ratio of 2.5x right now seems quite "middle-of-the-road" compared to the Electrical industry in China, where the median P/S ratio is around 2.4x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for Zhejiang Tony Electronic

How Zhejiang Tony Electronic Has Been Performing

The recent revenue growth at Zhejiang Tony Electronic would have to be considered satisfactory if not spectacular. It might be that many expect the respectable revenue performance to only match most other companies over the coming period, which has kept the P/S from rising. Those who are bullish on Zhejiang Tony Electronic will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

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 Zhejiang Tony Electronic's earnings, revenue and cash flow.

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

The only time you'd be comfortable seeing a P/S like Zhejiang Tony Electronic's is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered a decent 3.5% gain to the company's revenues. This was backed up an excellent period prior to see revenue up by 66% 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 23% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it interesting that Zhejiang Tony Electronic is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

What We Can Learn From Zhejiang Tony Electronic's P/S?

Zhejiang Tony Electronic's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Zhejiang Tony Electronic's average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. Unless the recent medium-term conditions improve, it's hard to accept the current share price as fair value.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Zhejiang Tony Electronic you should know about.

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.