Suzhou Electrical Apparatus Science Academy Co., Ltd.'s (SZSE:300215) Shares Climb 26% But Its Business Is Yet to Catch Up

Despite an already strong run, Suzhou Electrical Apparatus Science Academy Co., Ltd. (SZSE:300215) shares have been powering on, with a gain of 26% in the last thirty days. Unfortunately, despite the strong performance over the last month, the full year gain of 5.3% isn't as attractive.

Following the firm bounce in price, given around half the companies in China's Professional Services industry have price-to-sales ratios (or "P/S") below 3.1x, you may consider Suzhou Electrical Apparatus Science Academy as a stock to avoid entirely with its 6.1x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

View our latest analysis for Suzhou Electrical Apparatus Science Academy

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

The recent revenue growth at Suzhou Electrical Apparatus Science Academy would have to be considered satisfactory if not spectacular. Perhaps the market believes the recent revenue performance is strong enough to outperform the industry, which has inflated the P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Suzhou Electrical Apparatus Science Academy will help you shine a light on its historical performance.

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

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Suzhou Electrical Apparatus Science Academy's to be considered reasonable.

If we review the last year of revenue growth, the company posted a worthy increase of 2.5%. However, this wasn't enough as the latest three year period has seen an unpleasant 19% overall drop in revenue. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 45% shows it's an unpleasant look.

In light of this, it's alarming that Suzhou Electrical Apparatus Science Academy'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.

What We Can Learn From Suzhou Electrical Apparatus Science Academy's P/S?

The strong share price surge has lead to Suzhou Electrical Apparatus Science Academy'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.

Our examination of Suzhou Electrical Apparatus Science Academy revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. 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.

There are also other vital risk factors to consider and we've discovered 4 warning signs for Suzhou Electrical Apparatus Science Academy (1 is potentially serious!) that you should be aware of before investing here.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.