Shenzhen Urban Transport Planning Center Co., Ltd.'s (SZSE:301091) Shares Climb 112% But Its Business Is Yet to Catch Up

Shenzhen Urban Transport Planning Center Co., Ltd. (SZSE:301091) shareholders have had their patience rewarded with a 112% share price jump in the last month. The annual gain comes to 153% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, given around half the companies in China's Professional Services industry have price-to-sales ratios (or "P/S") below 3.2x, you may consider Shenzhen Urban Transport Planning Center as a stock to avoid entirely with its 10.3x 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 Shenzhen Urban Transport Planning Center

How Shenzhen Urban Transport Planning Center Has Been Performing

The revenue growth achieved at Shenzhen Urban Transport Planning Center over the last year would be more than acceptable for most companies. Perhaps the market is expecting this decent revenue performance to beat out the industry over the near term, which has kept the P/S propped up. 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 Shenzhen Urban Transport Planning Center's earnings, revenue and cash flow.

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

In order to justify its P/S ratio, Shenzhen Urban Transport Planning Center would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a decent 15% gain to the company's revenues. The latest three year period has also seen a 23% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 88% shows it's noticeably less attractive.

With this information, we find it concerning that Shenzhen Urban Transport Planning Center is trading at a P/S higher than the industry. 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. 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.

The Final Word

The strong share price surge has lead to Shenzhen Urban Transport Planning Center'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.

The fact that Shenzhen Urban Transport Planning Center 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. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. 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.

Plus, you should also learn about these 2 warning signs we've spotted with Shenzhen Urban Transport Planning Center.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.