Improved Revenues Required Before Guangdong SACA Precision Manufacturing Co., Ltd. (SZSE:300464) Stock's 32% Jump Looks Justified

Guangdong SACA Precision Manufacturing Co., Ltd. (SZSE:300464) shares have continued their recent momentum with a 32% gain in the last month alone. Unfortunately, despite the strong performance over the last month, the full year gain of 9.0% isn't as attractive.

Even after such a large jump in price, Guangdong SACA Precision Manufacturing may still be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 2x, since almost half of all companies in the Machinery industry in China have P/S ratios greater than 3.3x and even P/S higher than 6x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

See our latest analysis for Guangdong SACA Precision Manufacturing

What Does Guangdong SACA Precision Manufacturing's Recent Performance Look Like?

For example, consider that Guangdong SACA Precision Manufacturing's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

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

How Is Guangdong SACA Precision Manufacturing's Revenue Growth Trending?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Guangdong SACA Precision Manufacturing's to be considered reasonable.

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 12%. As a result, revenue from three years ago have also fallen 69% overall. 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.

With this in mind, we understand why Guangdong SACA Precision Manufacturing's P/S is lower than most of its industry peers. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

What Does Guangdong SACA Precision Manufacturing's P/S Mean For Investors?

The latest share price surge wasn't enough to lift Guangdong SACA Precision Manufacturing's P/S close to the industry median. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Guangdong SACA Precision Manufacturing confirms that the company's shrinking revenue over the past medium-term is a key factor in its low price-to-sales ratio, given the industry is projected to grow. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. If recent medium-term revenue trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

It is also worth noting that we have found 2 warning signs for Guangdong SACA Precision Manufacturing that you need to take into consideration.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.