There's Reason For Concern Over Sichuan Zhongguang Lightning Protection Technologies Co., Ltd.'s (SZSE:300414) Massive 46% Price Jump

The Sichuan Zhongguang Lightning Protection Technologies Co., Ltd. (SZSE:300414) share price has done very well over the last month, posting an excellent gain of 46%. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 16% in the last twelve months.

Following the firm bounce in price, you could be forgiven for thinking Sichuan Zhongguang Lightning Protection Technologies is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 6.4x, considering almost half the companies in China's Electrical industry have P/S ratios below 2.4x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Check out our latest analysis for Sichuan Zhongguang Lightning Protection Technologies

What Does Sichuan Zhongguang Lightning Protection Technologies' Recent Performance Look Like?

As an illustration, revenue has deteriorated at Sichuan Zhongguang Lightning Protection Technologies over the last year, which is not ideal at all. 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. However, if this isn't the case, investors might get caught out paying too much for the stock.

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 Sichuan Zhongguang Lightning Protection Technologies' earnings, revenue and cash flow.

What Are Revenue Growth Metrics Telling Us About The High P/S?

Sichuan Zhongguang Lightning Protection Technologies' 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.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 17%. The last three years don't look nice either as the company has shrunk revenue by 4.2% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 23% shows it's an unpleasant look.

In light of this, it's alarming that Sichuan Zhongguang Lightning Protection Technologies' P/S sits above the majority of other companies. 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 very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Bottom Line On Sichuan Zhongguang Lightning Protection Technologies' P/S

Sichuan Zhongguang Lightning Protection Technologies' P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

Our examination of Sichuan Zhongguang Lightning Protection Technologies revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Sichuan Zhongguang Lightning Protection Technologies (1 doesn't sit too well with us!) that you need to be mindful of.

If you're unsure about the strength of Sichuan Zhongguang Lightning Protection Technologies' 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.