More Unpleasant Surprises Could Be In Store For Suzhou Electrical Apparatus Science Academy Co., Ltd.'s (SZSE:300215) Shares After Tumbling 25%

The Suzhou Electrical Apparatus Science Academy Co., Ltd. (SZSE:300215) share price has softened a substantial 25% over the previous 30 days, handing back much of the gains the stock has made lately. Indeed, the recent drop has reduced its annual gain to a relatively sedate 6.9% over the last twelve months.

Even after such a large drop in price, when almost half of the companies in China's Professional Services industry have price-to-sales ratios (or "P/S") below 2.7x, you may still consider Suzhou Electrical Apparatus Science Academy as a stock not worth researching with its 6.4x 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.

See our latest analysis for Suzhou Electrical Apparatus Science Academy

What Does Suzhou Electrical Apparatus Science Academy's Recent Performance Look Like?

Revenue has risen at a steady rate over the last year for Suzhou Electrical Apparatus Science Academy, which is generally not a bad outcome. One possibility is that the P/S ratio is high because investors think this good revenue growth will be enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

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 Suzhou Electrical Apparatus Science Academy's earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Suzhou Electrical Apparatus Science Academy would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a decent 2.5% gain to the company's revenues. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 19% in total over the last three years. 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 46% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that Suzhou Electrical Apparatus Science Academy's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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

Even after such a strong price drop, Suzhou Electrical Apparatus Science Academy's P/S still exceeds the industry median significantly. 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.

We've established that Suzhou Electrical Apparatus Science Academy currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Suzhou Electrical Apparatus Science Academy (2 don't sit too well with us!) that you need to be mindful of.

If you're unsure about the strength of Suzhou Electrical Apparatus Science Academy's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.

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