Sichuan Jiuzhou Electronic Co., Ltd.'s (SZSE:000801) 28% Share Price Surge Not Quite Adding Up

Sichuan Jiuzhou Electronic Co., Ltd. (SZSE:000801) shares have continued their recent momentum with a 28% gain in the last month alone. The annual gain comes to 118% following the latest surge, making investors sit up and take notice.

After such a large jump in price, when almost half of the companies in China's Consumer Durables industry have price-to-sales ratios (or "P/S") below 2.4x, you may consider Sichuan Jiuzhou Electronic as a stock not worth researching with its 4.8x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Check out our latest analysis for Sichuan Jiuzhou Electronic

How Sichuan Jiuzhou Electronic Has Been Performing

As an illustration, revenue has deteriorated at Sichuan Jiuzhou Electronic over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

Although there are no analyst estimates available for Sichuan Jiuzhou Electronic, 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 Sichuan Jiuzhou Electronic?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Sichuan Jiuzhou Electronic's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 5.7% decrease to the company's top line. Regardless, revenue has managed to lift by a handy 14% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 10% shows it's noticeably less attractive.

With this information, we find it concerning that Sichuan Jiuzhou Electronic is trading at a P/S higher than the industry. It seems most investors are ignoring the fairly limited recent growth rates 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

Sichuan Jiuzhou Electronic's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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 Sichuan Jiuzhou Electronic 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's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Sichuan Jiuzhou Electronic, and understanding them should be part of your investment process.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.