Suzhou SLAC Precision Equipment CO.,Ltd.'s (SZSE:300382) Shares Climb 30% But Its Business Is Yet to Catch Up

Despite an already strong run, Suzhou SLAC Precision Equipment CO.,Ltd. (SZSE:300382) shares have been powering on, with a gain of 30% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 32% in the last year.

After such a large jump in price, when almost half of the companies in China's Machinery industry have price-to-sales ratios (or "P/S") below 3.2x, you may consider Suzhou SLAC Precision EquipmentLtd as a stock probably not worth researching with its 5.1x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

View our latest analysis for Suzhou SLAC Precision EquipmentLtd

How Suzhou SLAC Precision EquipmentLtd Has Been Performing

We'd have to say that with no tangible growth over the last year, Suzhou SLAC Precision EquipmentLtd's revenue has been unimpressive. Perhaps the market believes that revenue growth will improve markedly over current levels, inflating the P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Suzhou SLAC Precision EquipmentLtd will help you shine a light on its historical performance.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Suzhou SLAC Precision EquipmentLtd would need to produce impressive growth in excess of the industry.

Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. However, a few strong years before that means that it was still able to grow revenue by an impressive 70% in total over the last three years. So while the company has done a solid job in the past, it's somewhat concerning to see revenue growth decline as much as it has.

This is in contrast to the rest of the industry, which is expected to grow by 25% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in mind, we find it worrying that Suzhou SLAC Precision EquipmentLtd'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. 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.

The Key Takeaway

Suzhou SLAC Precision EquipmentLtd 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 Suzhou SLAC Precision EquipmentLtd 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 see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. 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.

Having said that, be aware Suzhou SLAC Precision EquipmentLtd is showing 5 warning signs in our investment analysis, and 3 of those are significant.

If you're unsure about the strength of Suzhou SLAC Precision EquipmentLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.