Subdued Growth No Barrier To Shanghai Yanhua Smartech Group Co., Ltd. (SZSE:002178) With Shares Advancing 48%

Despite an already strong run, Shanghai Yanhua Smartech Group Co., Ltd. (SZSE:002178) shares have been powering on, with a gain of 48% in the last thirty days. Unfortunately, despite the strong performance over the last month, the full year gain of 9.9% isn't as attractive.

Following the firm bounce in price, given around half the companies in China's Construction industry have price-to-sales ratios (or "P/S") below 1.2x, you may consider Shanghai Yanhua Smartech Group as a stock to avoid entirely with its 5.5x 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.

See our latest analysis for Shanghai Yanhua Smartech Group

What Does Shanghai Yanhua Smartech Group's Recent Performance Look Like?

For instance, Shanghai Yanhua Smartech Group's receding revenue in recent times would have to be some food for thought. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Although there are no analyst estimates available for Shanghai Yanhua Smartech Group, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

What Are Revenue Growth Metrics Telling Us About The High P/S?

Shanghai Yanhua Smartech Group's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than 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 12%. As a result, revenue from three years ago have also fallen 13% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

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

With this in mind, we find it worrying that Shanghai Yanhua Smartech Group's P/S exceeds that of its industry peers. 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.

The Key Takeaway

The strong share price surge has lead to Shanghai Yanhua Smartech Group's P/S soaring as well. 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've established that Shanghai Yanhua Smartech Group currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

You should always think about risks. Case in point, we've spotted 2 warning signs for Shanghai Yanhua Smartech Group you should be aware of.

If these risks are making you reconsider your opinion on Shanghai Yanhua Smartech Group, 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.