Bohai Leasing Co., Ltd. (SZSE:000415) Soars 38% But It's A Story Of Risk Vs Reward

Bohai Leasing Co., Ltd. (SZSE:000415) shareholders would be excited to see that the share price has had a great month, posting a 38% gain and recovering from prior weakness. Looking further back, the 18% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

In spite of the firm bounce in price, it's still not a stretch to say that Bohai Leasing's price-to-sales (or "P/S") ratio of 0.5x right now seems quite "middle-of-the-road" compared to the Trade Distributors industry in China, where the median P/S ratio is around 0.8x. 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.

See our latest analysis for Bohai Leasing

How Bohai Leasing Has Been Performing

Bohai Leasing has been doing a good job lately as it's been growing revenue at a solid pace. Perhaps the market is expecting future revenue performance to only keep up with the broader industry, which has keeping the P/S in line with expectations. If that doesn't eventuate, then existing shareholders probably aren't too pessimistic about the future direction of the share price.

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 Bohai Leasing's earnings, revenue and cash flow.

How Is Bohai Leasing's Revenue Growth Trending?

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

Taking a look back first, we see that the company managed to grow revenues by a handy 9.0% last year. Pleasingly, revenue has also lifted 64% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Comparing that to the industry, which is only predicted to deliver 14% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised revenue results.

With this information, we find it interesting that Bohai Leasing is trading at a fairly similar P/S compared to the industry. It may be that most investors are not convinced the company can maintain its recent growth rates.

The Bottom Line On Bohai Leasing's P/S

Bohai Leasing's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We didn't quite envision Bohai Leasing's P/S sitting in line with the wider industry, considering the revenue growth over the last three-year is higher than the current industry outlook. It'd be fair to assume that potential risks the company faces could be the contributing factor to the lower than expected P/S. At least the risk of a price drop looks to be subdued if recent medium-term revenue trends continue, but investors seem to think future revenue could see some volatility.

You need to take note of risks, for example - Bohai Leasing has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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.