WPG (Shanghai) Smart Water Public Co.,Ltd.'s (SHSE:603956) Price Is Right But Growth Is Lacking After Shares Rocket 36%

WPG (Shanghai) Smart Water Public Co.,Ltd. (SHSE:603956) shares have had a really impressive month, gaining 36% after a shaky period beforehand. Looking further back, the 20% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Even after such a large jump in price, WPG (Shanghai) Smart Water PublicLtd may still be sending buy signals at present with its price-to-sales (or "P/S") ratio of 2.4x, considering almost half of all companies in the Machinery industry in China have P/S ratios greater than 3.3x and even P/S higher than 6x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

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

How WPG (Shanghai) Smart Water PublicLtd Has Been Performing

The recent revenue growth at WPG (Shanghai) Smart Water PublicLtd would have to be considered satisfactory if not spectacular. One possibility is that the P/S ratio is low because investors think this good revenue growth might actually underperform the broader industry in the near future. 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?

There's an inherent assumption that a company should underperform the industry for P/S ratios like WPG (Shanghai) Smart Water PublicLtd's to be considered reasonable.

Retrospectively, the last year delivered a decent 6.7% gain to the company's revenues. Revenue has also lifted 15% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 22% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this in consideration, it's easy to understand why WPG (Shanghai) Smart Water PublicLtd'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.

What We Can Learn From WPG (Shanghai) Smart Water PublicLtd's P/S?

The latest share price surge wasn't enough to lift WPG (Shanghai) Smart Water PublicLtd's P/S close to 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 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. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with WPG (Shanghai) Smart Water PublicLtd, and understanding them should be part of your investment process.

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.