What EFORT Intelligent Equipment Co., Ltd.'s (SHSE:688165) 34% Share Price Gain Is Not Telling You

The EFORT Intelligent Equipment Co., Ltd. (SHSE:688165) share price has done very well over the last month, posting an excellent gain of 34%. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 9.4% in the last twelve months.

Even after such a large jump in price, it's still not a stretch to say that EFORT Intelligent Equipment's price-to-sales (or "P/S") ratio of 3.1x right now seems quite "middle-of-the-road" compared to the Machinery industry in China, where the median P/S ratio is around 2.8x. 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.

Check out our latest analysis for EFORT Intelligent Equipment

What Does EFORT Intelligent Equipment's P/S Mean For Shareholders?

The recent revenue growth at EFORT Intelligent Equipment 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. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on EFORT Intelligent Equipment will help you shine a light on its historical performance.

How Is EFORT Intelligent Equipment's Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like EFORT Intelligent Equipment's to be considered reasonable.

Retrospectively, the last year delivered a decent 3.7% gain to the company's revenues. The latest three year period has also seen an excellent 34% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing revenues over that time.

Comparing that to the industry, which is predicted to deliver 23% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this information, we find it interesting that EFORT Intelligent Equipment 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.

The Final Word

Its shares have lifted substantially and now EFORT Intelligent Equipment's P/S is back within range of the industry median. 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 EFORT Intelligent Equipment'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.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for EFORT Intelligent Equipment with six simple checks.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.