There's No Escaping Shandong Longertek Technology Co., Ltd.'s (SZSE:300594) Muted Revenues Despite A 43% Share Price Rise

The Shandong Longertek Technology Co., Ltd. (SZSE:300594) share price has done very well over the last month, posting an excellent gain of 43%. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 14% over that time.

Even after such a large jump in price, Shandong Longertek Technology's price-to-sales (or "P/S") ratio of 1.9x might still make it look like a buy right now compared to the Machinery industry in China, where around half of the companies have P/S ratios above 2.8x and even P/S above 5x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

Check out our latest analysis for Shandong Longertek Technology

What Does Shandong Longertek Technology's P/S Mean For Shareholders?

The revenue growth achieved at Shandong Longertek Technology over the last year would be more than acceptable for most companies. It might be that many expect the respectable revenue performance to degrade substantially, which has repressed the P/S. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction 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 Shandong Longertek Technology's earnings, revenue and cash flow.

Is There Any Revenue Growth Forecasted For Shandong Longertek Technology?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Shandong Longertek Technology's to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 18% last year. The latest three year period has also seen an excellent 58% overall rise in revenue, aided by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 23% shows it's noticeably less attractive.

With this information, we can see why Shandong Longertek Technology is trading at a P/S lower than the industry. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Key Takeaway

Shandong Longertek Technology's stock price has surged recently, but its but its P/S still remains modest. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

In line with expectations, Shandong Longertek Technology maintains its low P/S on the weakness of its recent three-year growth being lower than the wider industry forecast. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

It is also worth noting that we have found 2 warning signs for Shandong Longertek Technology (1 can't be ignored!) that you need to take into consideration.

If you're unsure about the strength of Shandong Longertek Technology's 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.