Funeng Oriental Equipment Technology Co., Ltd.'s (SZSE:300173) Shares Climb 54% But Its Business Is Yet to Catch Up

Funeng Oriental Equipment Technology Co., Ltd. (SZSE:300173) shares have continued their recent momentum with a 54% gain in the last month alone. Looking further back, the 12% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

After such a large jump in price, given close to half the companies operating in China's Machinery industry have price-to-sales ratios (or "P/S") below 3.2x, you may consider Funeng Oriental Equipment Technology as a stock to potentially avoid with its 5.1x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Funeng Oriental Equipment Technology

How Funeng Oriental Equipment Technology Has Been Performing

For example, consider that Funeng Oriental Equipment Technology's financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. If not, then existing shareholders may be quite nervous about the viability of the share price.

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 Funeng Oriental Equipment Technology's earnings, revenue and cash flow.

How Is Funeng Oriental Equipment Technology's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as high as Funeng Oriental Equipment Technology's is when the company's growth is on track to outshine the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 21%. As a result, revenue from three years ago have also fallen 18% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 25% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we find it worrying that Funeng Oriental Equipment Technology's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate 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 Bottom Line On Funeng Oriental Equipment Technology's P/S

The large bounce in Funeng Oriental Equipment Technology's shares has lifted the company's P/S handsomely. 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.

We've established that Funeng Oriental Equipment Technology currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Plus, you should also learn about these 3 warning signs we've spotted with Funeng Oriental Equipment Technology (including 2 which are significant).

If these risks are making you reconsider your opinion on Funeng Oriental Equipment Technology, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.