Subdued Growth No Barrier To Shanghai Cooltech Power Co., Ltd. (SZSE:300153) With Shares Advancing 30%

Despite an already strong run, Shanghai Cooltech Power Co., Ltd. (SZSE:300153) shares have been powering on, with a gain of 30% in the last thirty days. This latest share price bounce rounds out a remarkable 491% gain over the last twelve months.

After such a large jump in price, when almost half of the companies in China's Electrical industry have price-to-sales ratios (or "P/S") below 2.5x, you may consider Shanghai Cooltech Power as a stock not worth researching with its 10.4x 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.

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View our latest analysis for Shanghai Cooltech Power

What Does Shanghai Cooltech Power's P/S Mean For Shareholders?

Shanghai Cooltech Power certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. Perhaps the market is expecting future revenue performance to outperform the wider market, which has seemingly got people interested in the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Shanghai Cooltech Power's to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 34%. The strong recent performance means it was also able to grow revenue by 54% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Comparing that to the industry, which is predicted to deliver 28% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this in mind, we find it worrying that Shanghai Cooltech Power's P/S exceeds that of its industry peers. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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 Key Takeaway

The strong share price surge has lead to Shanghai Cooltech Power's P/S soaring as well. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

The fact that Shanghai Cooltech Power currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Shanghai Cooltech Power (1 is potentially serious) you should be aware of.

If you're unsure about the strength of Shanghai Cooltech Power'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.