Shenzhen Intelligent Precision Instrument Co., Ltd.'s (SZSE:301512) Shares Climb 29% But Its Business Is Yet to Catch Up

Shenzhen Intelligent Precision Instrument Co., Ltd. (SZSE:301512) shares have had a really impressive month, gaining 29% after a shaky period beforehand. Taking a wider view, although not as strong as the last month, the full year gain of 16% is also fairly reasonable.

Following the firm bounce in price, given close to half the companies operating in China's Machinery industry have price-to-sales ratios (or "P/S") below 3.3x, you may consider Shenzhen Intelligent Precision Instrument as a stock to potentially avoid with its 4.8x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

See our latest analysis for Shenzhen Intelligent Precision Instrument

How Has Shenzhen Intelligent Precision Instrument Performed Recently?

For instance, Shenzhen Intelligent Precision Instrument's receding revenue in recent times would have to be some food for thought. 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. 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 Shenzhen Intelligent Precision Instrument, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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

There's an inherent assumption that a company should outperform the industry for P/S ratios like Shenzhen Intelligent Precision Instrument's to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 6.4%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 8.5% overall rise in revenue. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 22% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this information, we find it concerning that Shenzhen Intelligent Precision Instrument is trading at a P/S higher than the industry. 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.

What Does Shenzhen Intelligent Precision Instrument's P/S Mean For Investors?

Shenzhen Intelligent Precision Instrument shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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.

The fact that Shenzhen Intelligent Precision Instrument currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

We don't want to rain on the parade too much, but we did also find 5 warning signs for Shenzhen Intelligent Precision Instrument (3 don't sit too well with us!) that you need to be mindful of.

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.