What Anhui Sinonet & Xinlong Science & Technology Co., Ltd.'s (SZSE:002298) 31% Share Price Gain Is Not Telling You

Despite an already strong run, Anhui Sinonet & Xinlong Science & Technology Co., Ltd. (SZSE:002298) shares have been powering on, with a gain of 31% in the last thirty days. Notwithstanding the latest gain, the annual share price return of 2.9% isn't as impressive.

In spite of the firm bounce in price, it's still not a stretch to say that Anhui Sinonet & Xinlong Science & Technology's price-to-sales (or "P/S") ratio of 2.2x right now seems quite "middle-of-the-road" compared to the Electrical industry in China, where the median P/S ratio is around 2.5x. 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.

View our latest analysis for Anhui Sinonet & Xinlong Science & Technology

How Anhui Sinonet & Xinlong Science & Technology Has Been Performing

The revenue growth achieved at Anhui Sinonet & Xinlong Science & Technology over the last year would be more than acceptable for most companies. 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.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Anhui Sinonet & Xinlong Science & Technology will help you shine a light on its historical performance.

How Is Anhui Sinonet & Xinlong Science & Technology's Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Anhui Sinonet & Xinlong Science & Technology's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 23% gain to the company's top line. However, this wasn't enough as the latest three year period has seen the company endure a nasty 27% drop in revenue in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 25% shows it's an unpleasant look.

With this information, we find it concerning that Anhui Sinonet & Xinlong Science & Technology is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

The Final Word

Anhui Sinonet & Xinlong Science & Technology'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 find it unexpected that Anhui Sinonet & Xinlong Science & Technology trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. 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.

Having said that, be aware Anhui Sinonet & Xinlong Science & Technology is showing 1 warning sign in our investment analysis, 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.