Jiangxi Special Electric Motor Co.,Ltd's (SZSE:002176) Shares Climb 27% But Its Business Is Yet to Catch Up

Jiangxi Special Electric Motor Co.,Ltd (SZSE:002176) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 3.2% in the last twelve months.

After such a large jump in price, when almost half of the companies in China's Electrical industry have price-to-sales ratios (or "P/S") below 2.4x, you may consider Jiangxi Special Electric MotorLtd as a stock not worth researching with its 8.5x 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 Jiangxi Special Electric MotorLtd

How Has Jiangxi Special Electric MotorLtd Performed Recently?

As an illustration, revenue has deteriorated at Jiangxi Special Electric MotorLtd over the last year, which is not ideal at all. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. If not, then existing shareholders may be quite nervous about the viability of the share price.

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

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Jiangxi Special Electric MotorLtd would need to produce outstanding growth that's well in excess of the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 70%. This means it has also seen a slide in revenue over the longer-term as revenue is down 25% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

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

With this information, we find it concerning that Jiangxi Special Electric MotorLtd 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. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What Does Jiangxi Special Electric MotorLtd's P/S Mean For Investors?

The strong share price surge has lead to Jiangxi Special Electric MotorLtd's P/S soaring as well. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Jiangxi Special Electric MotorLtd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Jiangxi Special Electric MotorLtd with six simple checks will allow you to discover any risks that could be an issue.

If these risks are making you reconsider your opinion on Jiangxi Special Electric MotorLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.