LIAONING ENERGY INDUSTRY Co.,LTD's (SHSE:600758) 27% Share Price Surge Not Quite Adding Up

The LIAONING ENERGY INDUSTRY Co.,LTD (SHSE:600758) share price has done very well over the last month, posting an excellent gain of 27%. The last 30 days bring the annual gain to a very sharp 44%.

In spite of the firm bounce in price, it's still not a stretch to say that LIAONING ENERGY INDUSTRYLTD's price-to-sales (or "P/S") ratio of 1.1x right now seems quite "middle-of-the-road" compared to the Metals and Mining industry in China, where the median P/S ratio is around 1.5x. 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.

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See our latest analysis for LIAONING ENERGY INDUSTRYLTD

What Does LIAONING ENERGY INDUSTRYLTD's Recent Performance Look Like?

As an illustration, revenue has deteriorated at LIAONING ENERGY INDUSTRYLTD over the last year, which is not ideal at all. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. If not, then existing shareholders may be a little nervous about the viability of the share price.

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Do Revenue Forecasts Match The P/S Ratio?

The only time you'd be comfortable seeing a P/S like LIAONING ENERGY INDUSTRYLTD's is when the company's growth is tracking the industry closely.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 9.8%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 7.7% overall rise in revenue. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 14% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it interesting that LIAONING ENERGY INDUSTRYLTD 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.

What Does LIAONING ENERGY INDUSTRYLTD's P/S Mean For Investors?

Its shares have lifted substantially and now LIAONING ENERGY INDUSTRYLTD's P/S is back within range of the industry median. 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 LIAONING ENERGY INDUSTRYLTD revealed its poor three-year revenue trends aren't resulting in a lower P/S as per our expectations, given they look worse than current industry outlook. Right now we are uncomfortable with the P/S as this revenue performance isn't likely to support a more positive sentiment for long. If recent medium-term revenue trends continue, the probability of a share price decline will become quite substantial, placing shareholders at risk.

Before you settle on your opinion, we've discovered 3 warning signs for LIAONING ENERGY INDUSTRYLTD that you should be aware of.

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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.