Why Investors Shouldn't Be Surprised By Shanghai Emperor of Cleaning Hi-Tech Co., Ltd's (SHSE:603200) 36% Share Price Surge

Despite an already strong run, Shanghai Emperor of Cleaning Hi-Tech Co., Ltd (SHSE:603200) shares have been powering on, with a gain of 36% in the last thirty days. The last 30 days bring the annual gain to a very sharp 41%.

After such a large jump in price, when almost half of the companies in China's Commercial Services industry have price-to-sales ratios (or "P/S") below 3x, you may consider Shanghai Emperor of Cleaning Hi-Tech as a stock not worth researching with its 8.7x 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.

Check out our latest analysis for Shanghai Emperor of Cleaning Hi-Tech

What Does Shanghai Emperor of Cleaning Hi-Tech's P/S Mean For Shareholders?

Recent revenue growth for Shanghai Emperor of Cleaning Hi-Tech has been in line with the industry. One possibility is that the P/S ratio is high because investors think this modest revenue performance will accelerate. If not, then existing shareholders may be a little nervous about the viability of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Shanghai Emperor of Cleaning Hi-Tech will help you uncover what's on the horizon.

How Is Shanghai Emperor of Cleaning Hi-Tech's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Shanghai Emperor of Cleaning Hi-Tech's to be considered reasonable.

Retrospectively, the last year delivered a decent 3.7% gain to the company's revenues. Revenue has also lifted 6.1% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 61% as estimated by the only analyst watching the company. With the industry only predicted to deliver 35%, the company is positioned for a stronger revenue result.

In light of this, it's understandable that Shanghai Emperor of Cleaning Hi-Tech's P/S sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Shanghai Emperor of Cleaning Hi-Tech's P/S?

The strong share price surge has lead to Shanghai Emperor of Cleaning Hi-Tech's P/S soaring as well. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that Shanghai Emperor of Cleaning Hi-Tech maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Commercial Services industry, as expected. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. It's hard to see the share price falling strongly in the near future under these circumstances.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Shanghai Emperor of Cleaning Hi-Tech with six simple checks on some of these key factors.

If these risks are making you reconsider your opinion on Shanghai Emperor of Cleaning Hi-Tech, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.