There's Reason For Concern Over ShaoYang Victor Hydraulics Co.,Ltd's (SZSE:301079) Massive 37% Price Jump

ShaoYang Victor Hydraulics Co.,Ltd (SZSE:301079) shares have continued their recent momentum with a 37% gain in the last month alone. Unfortunately, despite the strong performance over the last month, the full year gain of 4.1% isn't as attractive.

After such a large jump in price, you could be forgiven for thinking ShaoYang Victor HydraulicsLtd is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 7.5x, considering almost half the companies in China's Machinery industry have P/S ratios below 2.8x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for ShaoYang Victor HydraulicsLtd

What Does ShaoYang Victor HydraulicsLtd's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at ShaoYang Victor HydraulicsLtd 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. If not, then existing shareholders may be quite nervous about the viability of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on ShaoYang Victor HydraulicsLtd will help you shine a light on its historical performance.

Do Revenue Forecasts Match The High P/S Ratio?

ShaoYang Victor HydraulicsLtd's 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.

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 7.4%. As a result, revenue from three years ago have also fallen 26% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

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 ShaoYang Victor HydraulicsLtd'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. 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 ShaoYang Victor HydraulicsLtd's P/S

ShaoYang Victor HydraulicsLtd's P/S has grown nicely over the last month thanks to a handy boost in the share price. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of ShaoYang Victor HydraulicsLtd 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. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

You need to take note of risks, for example - ShaoYang Victor HydraulicsLtd has 4 warning signs (and 2 which are concerning) we think you should know about.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.