Further Upside For Shanghai Morn Electric Equipment Co., Ltd. (SZSE:002451) Shares Could Introduce Price Risks After 28% Bounce

Those holding Shanghai Morn Electric Equipment Co., Ltd. (SZSE:002451) shares would be relieved that the share price has rebounded 28% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 8.3% over the last year.

Although its price has surged higher, you could still be forgiven for feeling indifferent about Shanghai Morn Electric Equipment's P/S ratio of 2.4x, since the median price-to-sales (or "P/S") ratio for the Electrical industry in China is also close to 2.1x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Check out our latest analysis for Shanghai Morn Electric Equipment

What Does Shanghai Morn Electric Equipment's Recent Performance Look Like?

For example, consider that Shanghai Morn Electric Equipment's financial performance has been poor lately as its revenue has been in decline. 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 not, then existing shareholders may be a little nervous about the viability of the share price.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Shanghai Morn Electric Equipment's earnings, revenue and cash flow.

Is There Some Revenue Growth Forecasted For Shanghai Morn Electric Equipment?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Shanghai Morn Electric Equipment's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 3.2% decrease to the company's top line. However, a few very strong years before that means that it was still able to grow revenue by an impressive 180% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 26% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we find it interesting that Shanghai Morn Electric Equipment is trading at a fairly similar P/S compared to the industry. Apparently some shareholders believe the recent performance is at its limits and have been accepting lower selling prices.

The Final Word

Its shares have lifted substantially and now Shanghai Morn Electric Equipment's P/S is back within range of the industry median. 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.

To our surprise, Shanghai Morn Electric Equipment revealed its three-year revenue trends aren't contributing to its P/S as much as we would have predicted, given they look better than current industry expectations. There could be some unobserved threats to revenue preventing the P/S ratio from matching this positive performance. It appears some are indeed anticipating revenue instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

We don't want to rain on the parade too much, but we did also find 4 warning signs for Shanghai Morn Electric Equipment (2 are potentially serious!) that you need to be mindful of.

If these risks are making you reconsider your opinion on Shanghai Morn Electric Equipment, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.