What Guoguang Electric Co.,Ltd.Chengdu's (SHSE:688776) 33% Share Price Gain Is Not Telling You

Despite an already strong run, Guoguang Electric Co.,Ltd.Chengdu (SHSE:688776) shares have been powering on, with a gain of 33% in the last thirty days. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 30% over that time.

After such a large jump in price, given around half the companies in China's Electrical industry have price-to-sales ratios (or "P/S") below 2.5x, you may consider Guoguang ElectricLtd.Chengdu as a stock to avoid entirely with its 11.2x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Guoguang ElectricLtd.Chengdu

What Does Guoguang ElectricLtd.Chengdu's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Guoguang ElectricLtd.Chengdu over the last year, which is not ideal at all. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

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 Guoguang ElectricLtd.Chengdu's earnings, revenue and cash flow.

How Is Guoguang ElectricLtd.Chengdu's Revenue Growth Trending?

In order to justify its P/S ratio, Guoguang ElectricLtd.Chengdu would need to produce outstanding growth that's well in excess of the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 20%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 18% overall rise in revenue. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

This is in contrast to the rest of the industry, which is expected to grow by 26% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Guoguang ElectricLtd.Chengdu is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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.

What We Can Learn From Guoguang ElectricLtd.Chengdu's P/S?

The strong share price surge has lead to Guoguang ElectricLtd.Chengdu'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.

Our examination of Guoguang ElectricLtd.Chengdu revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Guoguang ElectricLtd.Chengdu (2 make us uncomfortable!) that you should be aware of before investing here.

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.