What SanFeng Intelligent Equipment Group Co., Ltd.'s (SZSE:300276) 44% Share Price Gain Is Not Telling You

The SanFeng Intelligent Equipment Group Co., Ltd. (SZSE:300276) share price has done very well over the last month, posting an excellent gain of 44%. Looking further back, the 24% 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 2.8x, you may consider SanFeng Intelligent Equipment Group as a stock to potentially avoid with its 3.8x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

Check out our latest analysis for SanFeng Intelligent Equipment Group

What Does SanFeng Intelligent Equipment Group's Recent Performance Look Like?

Revenue has risen firmly for SanFeng Intelligent Equipment Group recently, which is pleasing to see. One possibility is that the P/S ratio is high because investors think this respectable revenue growth will be enough to outperform the broader industry in the near future. 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 SanFeng Intelligent Equipment Group, 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?

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

Retrospectively, the last year delivered a decent 7.7% gain to the company's revenues. This was backed up an excellent period prior to see revenue up by 63% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 23% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this information, we find it concerning that SanFeng Intelligent Equipment Group is trading at a P/S higher than the industry. 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. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What Does SanFeng Intelligent Equipment Group's P/S Mean For Investors?

SanFeng Intelligent Equipment Group shares have taken a big step in a northerly direction, but its P/S is elevated as a result. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of SanFeng Intelligent Equipment Group 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 the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

You should always think about risks. Case in point, we've spotted 1 warning sign for SanFeng Intelligent Equipment Group you should be aware of.

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.