Market Might Still Lack Some Conviction On China Western Power Industrial Co., Ltd. (SZSE:002630) Even After 26% Share Price Boost

China Western Power Industrial Co., Ltd. (SZSE:002630) shares have continued their recent momentum with a 26% gain in the last month alone. The annual gain comes to 112% following the latest surge, making investors sit up and take notice.

Even after such a large jump in price, China Western Power Industrial's price-to-sales (or "P/S") ratio of 2.2x might still make it look like a buy right now compared to the Machinery industry in China, where around half of the companies have P/S ratios above 3.5x and even P/S above 6x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

View our latest analysis for China Western Power Industrial

What Does China Western Power Industrial's Recent Performance Look Like?

With revenue growth that's exceedingly strong of late, China Western Power Industrial has been doing very well. Perhaps the market is expecting future revenue performance to dwindle, which has kept the P/S suppressed. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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 China Western Power Industrial's earnings, revenue and cash flow.

What Are Revenue Growth Metrics Telling Us About The Low P/S?

China Western Power Industrial's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

Taking a look back first, we see that the company grew revenue by an impressive 40% last year. The strong recent performance means it was also able to grow revenue by 161% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

When compared to the industry's one-year growth forecast of 22%, the most recent medium-term revenue trajectory is noticeably more alluring

In light of this, it's peculiar that China Western Power Industrial's P/S sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Final Word

China Western Power Industrial's stock price has surged recently, but its but its P/S still remains modest. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of China Western Power Industrial revealed its three-year revenue trends aren't boosting its P/S anywhere near as much as we would have predicted, given they look better than current industry expectations. Potential investors that are sceptical over continued revenue performance may be preventing the P/S ratio from matching previous strong performance. At least price risks look to be very low if recent medium-term revenue trends continue, but investors seem to think future revenue could see a lot of volatility.

Having said that, be aware China Western Power Industrial is showing 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.