Taier Heavy Industry Co., Ltd. (SZSE:002347) Stock Rockets 51% As Investors Are Less Pessimistic Than Expected

Taier Heavy Industry Co., Ltd. (SZSE:002347) shareholders have had their patience rewarded with a 51% share price jump in the last month. Unfortunately, despite the strong performance over the last month, the full year gain of 3.8% isn't as attractive.

Even after such a large jump in price, there still wouldn't be many who think Taier Heavy Industry's price-to-sales (or "P/S") ratio of 2.6x is worth a mention when the median P/S in China's Machinery industry is similar at about 2.7x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for Taier Heavy Industry

What Does Taier Heavy Industry's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Taier Heavy Industry over the last year, which is not ideal at all. One possibility is that the P/S is moderate because investors think the company might still do enough to be in line with the broader industry in the near future. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

Although there are no analyst estimates available for Taier Heavy Industry, 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 P/S?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Taier Heavy Industry's to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 4.8%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 12% overall rise in revenue. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

This is in contrast to the rest of the industry, which is expected to grow by 23% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in mind, we find it intriguing that Taier Heavy Industry's P/S is comparable to that of its industry peers. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What Does Taier Heavy Industry's P/S Mean For Investors?

Taier Heavy Industry appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Taier Heavy Industry revealed its poor three-year revenue trends aren't resulting in a lower P/S as per our expectations, given they look worse than current industry outlook. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. If recent medium-term revenue trends continue, the probability of a share price decline will become quite substantial, placing shareholders at risk.

It is also worth noting that we have found 1 warning sign for Taier Heavy Industry that you need to take into consideration.

If these risks are making you reconsider your opinion on Taier Heavy Industry, 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.