What Shandong Mining Machinery Group Co., Ltd.'s (SZSE:002526) 35% Share Price Gain Is Not Telling You

Shandong Mining Machinery Group Co., Ltd. (SZSE:002526) shares have continued their recent momentum with a 35% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 33%.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about Shandong Mining Machinery Group's P/S ratio of 2.9x, since the median price-to-sales (or "P/S") ratio for the Machinery industry in China is also close to 3.2x. 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.

See our latest analysis for Shandong Mining Machinery Group

How Shandong Mining Machinery Group Has Been Performing

As an illustration, revenue has deteriorated at Shandong Mining Machinery Group over the last year, which is not ideal at all. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. 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.

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

Do Revenue Forecasts Match The P/S Ratio?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Shandong Mining Machinery Group'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 17%. At least revenue has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 22% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

In light of this, it's curious that Shandong Mining Machinery Group's P/S sits in line with the majority of other companies. 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 We Can Learn From Shandong Mining Machinery Group's P/S?

Shandong Mining Machinery Group's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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.

We've established that Shandong Mining Machinery Group's average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. 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. 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.

Having said that, be aware Shandong Mining Machinery Group is showing 4 warning signs in our investment analysis, and 1 of those is significant.

If you're unsure about the strength of Shandong Mining Machinery Group'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.