There's Reason For Concern Over Shanghai Taihe Water Technology Development Co.,Ltd.'s (SHSE:605081) Massive 26% Price Jump

Shanghai Taihe Water Technology Development Co.,Ltd. (SHSE:605081) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 22% over that time.

Following the firm bounce in price, given around half the companies in China's Commercial Services industry have price-to-sales ratios (or "P/S") below 2.6x, you may consider Shanghai Taihe Water Technology DevelopmentLtd as a stock to avoid entirely with its 8.3x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Shanghai Taihe Water Technology DevelopmentLtd

How Shanghai Taihe Water Technology DevelopmentLtd Has Been Performing

For instance, Shanghai Taihe Water Technology DevelopmentLtd's receding revenue in recent times would have to be some food for thought. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Shanghai Taihe Water Technology DevelopmentLtd's earnings, revenue and cash flow.

How Is Shanghai Taihe Water Technology DevelopmentLtd's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Shanghai Taihe Water Technology DevelopmentLtd'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%. The last three years don't look nice either as the company has shrunk revenue by 69% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 30% 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 Shanghai Taihe Water Technology DevelopmentLtd's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Final Word

The strong share price surge has lead to Shanghai Taihe Water Technology DevelopmentLtd'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.

We've established that Shanghai Taihe Water Technology DevelopmentLtd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. 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. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Shanghai Taihe Water Technology DevelopmentLtd (of which 1 is significant!) you should know about.

If these risks are making you reconsider your opinion on Shanghai Taihe Water Technology DevelopmentLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.