There's Reason For Concern Over Shenzhen Zhaowei Machinery & Electronics Co., Ltd.'s (SZSE:003021) Massive 26% Price Jump

Shenzhen Zhaowei Machinery & Electronics Co., Ltd. (SZSE:003021) shares have continued their recent momentum with a 26% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 34% in the last year.

After such a large jump in price, given around half the companies in China's Electrical industry have price-to-sales ratios (or "P/S") below 2.5x, you may consider Shenzhen Zhaowei Machinery & Electronics as a stock to avoid entirely with its 12.9x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Shenzhen Zhaowei Machinery & Electronics

How Shenzhen Zhaowei Machinery & Electronics Has Been Performing

With revenue growth that's superior to most other companies of late, Shenzhen Zhaowei Machinery & Electronics has been doing relatively well. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Keen to find out how analysts think Shenzhen Zhaowei Machinery & Electronics' future stacks up against the industry? In that case, our free report is a great place to start.

How Is Shenzhen Zhaowei Machinery & Electronics' Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Shenzhen Zhaowei Machinery & Electronics' is when the company's growth is on track to outshine the industry decidedly.

If we review the last year of revenue growth, the company posted a terrific increase of 22%. The latest three year period has also seen a 24% overall rise in revenue, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Shifting to the future, estimates from the four analysts covering the company suggest revenue should grow by 23% over the next year. That's shaping up to be similar to the 25% growth forecast for the broader industry.

With this information, we find it interesting that Shenzhen Zhaowei Machinery & Electronics is trading at a high P/S compared to the industry. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

The Final Word

Shares in Shenzhen Zhaowei Machinery & Electronics have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

Seeing as its revenues are forecast to grow in line with the wider industry, it would appear that Shenzhen Zhaowei Machinery & Electronics currently trades on a higher than expected P/S. Right now we are uncomfortable with the relatively high share price as the predicted future revenues aren't likely to support such positive sentiment for long. A positive change is needed in order to justify the current price-to-sales ratio.

It is also worth noting that we have found 1 warning sign for Shenzhen Zhaowei Machinery & Electronics that you need to take into consideration.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.