Even With A 31% Surge, Cautious Investors Are Not Rewarding Shenzhen Minglida Precision Technology Co., Ltd.'s (SZSE:301268) Performance Completely

Shenzhen Minglida Precision Technology Co., Ltd. (SZSE:301268) shareholders would be excited to see that the share price has had a great month, posting a 31% gain and recovering from prior weakness. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 33% in the last twelve months.

Even after such a large jump in price, there still wouldn't be many who think Shenzhen Minglida Precision Technology's price-to-sales (or "P/S") ratio of 2.4x is worth a mention when the median P/S in China's Machinery industry is similar at about 2.5x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

See our latest analysis for Shenzhen Minglida Precision Technology

How Has Shenzhen Minglida Precision Technology Performed Recently?

Shenzhen Minglida Precision Technology hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. One possibility is that the P/S ratio is moderate because investors think this poor revenue performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

Want the full picture on analyst estimates for the company? Then our free report on Shenzhen Minglida Precision Technology will help you uncover what's on the horizon.

What Are Revenue Growth Metrics Telling Us About The P/S?

In order to justify its P/S ratio, Shenzhen Minglida Precision Technology would need to produce growth that's similar to 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 22%. Still, the latest three year period has seen an excellent 92% overall rise in revenue, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 123% as estimated by the sole analyst watching the company. Meanwhile, the rest of the industry is forecast to only expand by 23%, which is noticeably less attractive.

With this in consideration, we find it intriguing that Shenzhen Minglida Precision Technology's P/S is closely matching its industry peers. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

What Does Shenzhen Minglida Precision Technology's P/S Mean For Investors?

Shenzhen Minglida Precision Technology appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Shenzhen Minglida Precision Technology currently trades on a lower than expected P/S since its forecasted revenue growth is higher than the wider industry. Perhaps uncertainty in the revenue forecasts are what's keeping the P/S ratio consistent with the rest of the industry. This uncertainty seems to be reflected in the share price which, while stable, could be higher given the revenue forecasts.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Shenzhen Minglida Precision Technology (at least 2 which can't be ignored), and understanding these should be part of your investment process.

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.