Shenzhen Auto Electric Power Plant Co.,Ltd (SZSE:002227) Stock Rockets 37% As Investors Are Less Pessimistic Than Expected

Shenzhen Auto Electric Power Plant Co.,Ltd (SZSE:002227) shareholders have had their patience rewarded with a 37% share price jump in the last month. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 22% over that time.

Since its price has surged higher, given around half the companies in China's Electrical industry have price-to-sales ratios (or "P/S") below 2.4x, you may consider Shenzhen Auto Electric Power PlantLtd as a stock to avoid entirely with its 6.6x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for Shenzhen Auto Electric Power PlantLtd

How Has Shenzhen Auto Electric Power PlantLtd Performed Recently?

The revenue growth achieved at Shenzhen Auto Electric Power PlantLtd over the last year would be more than acceptable for most companies. It might be that many expect the respectable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders may be a little 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 Shenzhen Auto Electric Power PlantLtd 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, Shenzhen Auto Electric Power PlantLtd would need to produce outstanding growth that's well in excess of the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 17%. As a result, it also grew revenue by 10% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 23% shows it's noticeably less attractive.

With this information, we find it concerning that Shenzhen Auto Electric Power PlantLtd 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.

The Bottom Line On Shenzhen Auto Electric Power PlantLtd's P/S

Shenzhen Auto Electric Power PlantLtd's P/S has grown nicely over the last month thanks to a handy boost in the share price. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Shenzhen Auto Electric Power PlantLtd 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 see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Before you take the next step, you should know about the 1 warning sign for Shenzhen Auto Electric Power PlantLtd that we have uncovered.

If you're unsure about the strength of Shenzhen Auto Electric Power PlantLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.