Guangdong DP Co.,Ltd.'s (SZSE:300808) Shares Climb 41% But Its Business Is Yet to Catch Up

Guangdong DP Co.,Ltd. (SZSE:300808) shareholders would be excited to see that the share price has had a great month, posting a 41% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 50%.

After such a large jump in price, given around half the companies in China's Electrical industry have price-to-sales ratios (or "P/S") below 2.4x, you may consider Guangdong DPLtd as a stock to avoid entirely with its 8.1x 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 so lofty.

View our latest analysis for Guangdong DPLtd

What Does Guangdong DPLtd's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Guangdong DPLtd over the last year, which is not ideal at all. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. If not, then existing shareholders may be quite nervous about the viability 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 Guangdong DPLtd's earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Guangdong DPLtd's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 11% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 40% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 23% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's alarming that Guangdong DPLtd's P/S sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What We Can Learn From Guangdong DPLtd's P/S?

The strong share price surge has lead to Guangdong DPLtd's P/S soaring as well. 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.

Our examination of Guangdong DPLtd 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. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. 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.

You should always think about risks. Case in point, we've spotted 3 warning signs for Guangdong DPLtd you should be aware of, and 1 of them shouldn't be ignored.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.