Optimistic Investors Push Jinlihua Electric Co., Ltd. (SZSE:300069) Shares Up 37% But Growth Is Lacking

Jinlihua Electric Co., Ltd. (SZSE:300069) shareholders have had their patience rewarded with a 37% share price jump in the last month. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 2.7% over the last year.

After such a large jump in price, you could be forgiven for thinking Jinlihua Electric is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 7.8x, considering almost half the companies in China's Machinery industry have P/S ratios below 2.6x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Jinlihua Electric

How Jinlihua Electric Has Been Performing

With revenue growth that's exceedingly strong of late, Jinlihua Electric has been doing very well. The P/S ratio is probably high because investors think this strong revenue growth will be enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

Although there are no analyst estimates available for Jinlihua Electric, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Jinlihua Electric's Revenue Growth Trending?

Jinlihua Electric's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered an exceptional 98% gain to the company's top line. As a result, it also grew revenue by 20% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 24% shows it's noticeably less attractive.

With this in mind, we find it worrying that Jinlihua Electric's P/S exceeds that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Final Word

Jinlihua Electric's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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 Jinlihua Electric revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. 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.

It is also worth noting that we have found 2 warning signs for Jinlihua Electric (1 makes us a bit uncomfortable!) that you need to take into consideration.

If you're unsure about the strength of Jinlihua Electric'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.