Tianjin Jieqiang Power Equipment Co.,Ltd.'s (SZSE:300875) Shares Climb 55% But Its Business Is Yet to Catch Up

Tianjin Jieqiang Power Equipment Co.,Ltd. (SZSE:300875) shares have continued their recent momentum with a 55% gain in the last month alone. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 2.8% in the last twelve months.

Since its price has surged higher, given around half the companies in China's Aerospace & Defense industry have price-to-sales ratios (or "P/S") below 7.4x, you may consider Tianjin Jieqiang Power EquipmentLtd as a stock to avoid entirely with its 12.3x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for Tianjin Jieqiang Power EquipmentLtd

What Does Tianjin Jieqiang Power EquipmentLtd's P/S Mean For Shareholders?

For example, consider that Tianjin Jieqiang Power EquipmentLtd's financial performance has been poor lately as its revenue has been in decline. 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. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

How Is Tianjin Jieqiang Power EquipmentLtd's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Tianjin Jieqiang Power EquipmentLtd's is when the company's growth is on track to outshine the industry decidedly.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 15%. Even so, admirably revenue has lifted 38% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

Comparing that to the industry, which is predicted to deliver 40% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

In light of this, it's alarming that Tianjin Jieqiang Power EquipmentLtd's P/S sits above the majority of other companies. 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 Final Word

The strong share price surge has lead to Tianjin Jieqiang Power EquipmentLtd'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 Tianjin Jieqiang Power 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. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. 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 always need to take note of risks, for example - Tianjin Jieqiang Power EquipmentLtd has 2 warning signs we think you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.