What WPG (Shanghai) Smart Water Public Co.,Ltd.'s (SHSE:603956) 25% Share Price Gain Is Not Telling You

WPG (Shanghai) Smart Water Public Co.,Ltd. (SHSE:603956) shareholders are no doubt pleased to see that the share price has bounced 25% in the last month, although it is still struggling to make up recently lost ground. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 23% over that time.

Even after such a large jump in price, it's still not a stretch to say that WPG (Shanghai) Smart Water PublicLtd's price-to-sales (or "P/S") ratio of 2.7x right now seems quite "middle-of-the-road" compared to the Machinery industry in China, seeing as it matches the P/S ratio of the wider industry. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

View our latest analysis for WPG (Shanghai) Smart Water PublicLtd

What Does WPG (Shanghai) Smart Water PublicLtd's P/S Mean For Shareholders?

With revenue growth that's exceedingly strong of late, WPG (Shanghai) Smart Water PublicLtd has been doing very well. It might be that many expect the strong revenue performance to wane, which has kept the share price, and thus the P/S ratio, from rising. Those who are bullish on WPG (Shanghai) Smart Water PublicLtd will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on WPG (Shanghai) Smart Water PublicLtd will help you shine a light on its historical performance.

How Is WPG (Shanghai) Smart Water PublicLtd's Revenue Growth Trending?

WPG (Shanghai) Smart Water PublicLtd's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

Retrospectively, the last year delivered an exceptional 34% gain to the company's top line. The latest three year period has also seen an excellent 43% overall rise in revenue, aided by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Comparing that to the industry, which is predicted to deliver 27% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

In light of this, it's curious that WPG (Shanghai) Smart Water PublicLtd's P/S sits in line with the majority of other companies. 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. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Final Word

Its shares have lifted substantially and now WPG (Shanghai) Smart Water PublicLtd's P/S is back within range of the industry median. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of WPG (Shanghai) Smart Water PublicLtd revealed its poor three-year revenue trends aren't resulting in a lower P/S as per our expectations, given they look worse than current industry outlook. Right now we are uncomfortable with the P/S as this revenue performance isn't likely to support a more positive sentiment for long. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for WPG (Shanghai) Smart Water PublicLtd that you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.