After Leaping 25% Shanghai Zhezhong Group Co.,Ltd (SZSE:002346) Shares Are Not Flying Under The Radar

Despite an already strong run, Shanghai Zhezhong Group Co.,Ltd (SZSE:002346) shares have been powering on, with a gain of 25% in the last thirty days. Taking a wider view, although not as strong as the last month, the full year gain of 15% is also fairly reasonable.

Since its price has surged higher, you could be forgiven for thinking Shanghai Zhezhong GroupLtd is a stock not worth researching with a price-to-sales ratios (or "P/S") of 4.2x, considering almost half the companies in China's Electrical industry have P/S ratios below 2.3x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Shanghai Zhezhong GroupLtd

What Does Shanghai Zhezhong GroupLtd's P/S Mean For Shareholders?

With revenue growth that's exceedingly strong of late, Shanghai Zhezhong GroupLtd has been doing very well. The P/S ratio is probably high because investors think this strong revenue growth will be enough to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

How Is Shanghai Zhezhong GroupLtd's Revenue Growth Trending?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Shanghai Zhezhong GroupLtd's to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 74%. The strong recent performance means it was also able to grow revenue by 123% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

This is in contrast to the rest of the industry, which is expected to grow by 25% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Shanghai Zhezhong GroupLtd's P/S sits above the majority of other companies. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the wider industry.

The Final Word

Shanghai Zhezhong GroupLtd shares have taken a big step in a northerly direction, but its P/S is elevated as a result. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

It's no surprise that Shanghai Zhezhong GroupLtd can support its high P/S given the strong revenue growth its experienced over the last three-year is superior to the current industry outlook. Right now shareholders are comfortable with the P/S as they are quite confident revenue aren't under threat. Barring any significant changes to the company's ability to make money, the share price should continue to be propped up.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Shanghai Zhezhong GroupLtd 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.