SEP Analytical (Shanghai) Co., Ltd.'s (SZSE:301228) Shares Climb 30% But Its Business Is Yet to Catch Up

SEP Analytical (Shanghai) Co., Ltd. (SZSE:301228) shareholders would be excited to see that the share price has had a great month, posting a 30% gain and recovering from prior weakness. The annual gain comes to 105% following the latest surge, making investors sit up and take notice.

Even after such a large jump in price, it's still not a stretch to say that SEP Analytical (Shanghai)'s price-to-sales (or "P/S") ratio of 4.1x right now seems quite "middle-of-the-road" compared to the Professional Services industry in China, where the median P/S ratio is around 3.7x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

View our latest analysis for SEP Analytical (Shanghai)

What Does SEP Analytical (Shanghai)'s Recent Performance Look Like?

SEP Analytical (Shanghai) has been doing a good job lately as it's been growing revenue at a solid pace. It might be that many expect the respectable revenue performance to wane, which has kept the P/S from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

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 SEP Analytical (Shanghai)'s earnings, revenue and cash flow.

Is There Some Revenue Growth Forecasted For SEP Analytical (Shanghai)?

In order to justify its P/S ratio, SEP Analytical (Shanghai) would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a decent 10% gain to the company's revenues. However, due to its less than impressive performance prior to this period, revenue growth is practically non-existent over the last three years overall. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 25% shows it's noticeably less attractive.

With this information, we find it interesting that SEP Analytical (Shanghai) is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

The Final Word

SEP Analytical (Shanghai) appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry 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 SEP Analytical (Shanghai)'s average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. Right now we are uncomfortable with the P/S as this revenue performance isn't likely to support a more positive sentiment for long. Unless the recent medium-term conditions improve, it's hard to accept the current share price as fair value.

You should always think about risks. Case in point, we've spotted 1 warning sign for SEP Analytical (Shanghai) you should be aware of.

If these risks are making you reconsider your opinion on SEP Analytical (Shanghai), 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.