What SEP Analytical (Shanghai) Co., Ltd.'s (SZSE:301228) 31% Share Price Gain Is Not Telling You

SEP Analytical (Shanghai) Co., Ltd. (SZSE:301228) shareholders would be excited to see that the share price has had a great month, posting a 31% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 45%.

Since its price has surged higher, SEP Analytical (Shanghai)'s price-to-sales (or "P/S") ratio of 5.1x might make it look like a sell right now compared to the wider Professional Services industry in China, where around half of the companies have P/S ratios below 3.8x and even P/S below 1.7x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

View our latest analysis for SEP Analytical (Shanghai)

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

The revenue growth achieved at SEP Analytical (Shanghai) over the last year would be more than acceptable for most companies. One possibility is that the P/S ratio is high because investors think this respectable revenue growth will be enough to outperform the broader industry in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

Although there are no analyst estimates available for SEP Analytical (Shanghai), take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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

In order to justify its P/S ratio, SEP Analytical (Shanghai) would need to produce impressive growth in excess of the industry.

Retrospectively, the last year delivered a decent 10% gain to the company's revenues. Although, the latest three year period in total hasn't been as good as it didn't manage to provide any growth at all. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 24% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

In light of this, it's alarming that SEP Analytical (Shanghai)'s P/S sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. 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.

What Does SEP Analytical (Shanghai)'s P/S Mean For Investors?

The large bounce in SEP Analytical (Shanghai)'s shares has lifted the company's P/S handsomely. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

The fact that SEP Analytical (Shanghai) 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. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

It is also worth noting that we have found 2 warning signs for SEP Analytical (Shanghai) (1 is concerning!) that you need to take into consideration.

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.