Subdued Growth No Barrier To Suzhou Chunxing Precision Mechanical Co., Ltd. (SZSE:002547) With Shares Advancing 27%

Despite an already strong run, Suzhou Chunxing Precision Mechanical Co., Ltd. (SZSE:002547) shares have been powering on, with a gain of 27% in the last thirty days. Looking further back, the 11% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

After such a large jump in price, when almost half of the companies in China's Metals and Mining industry have price-to-sales ratios (or "P/S") below 1.5x, you may consider Suzhou Chunxing Precision Mechanical as a stock probably not worth researching with its 3.3x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Suzhou Chunxing Precision Mechanical

What Does Suzhou Chunxing Precision Mechanical's Recent Performance Look Like?

For instance, Suzhou Chunxing Precision Mechanical's receding revenue in recent times would have to be some food for thought. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. 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 Suzhou Chunxing Precision Mechanical'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, Suzhou Chunxing Precision Mechanical would need to produce impressive growth in excess of the industry.

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 19%. As a result, revenue from three years ago have also fallen 19% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 14% shows it's an unpleasant look.

With this information, we find it concerning that Suzhou Chunxing Precision Mechanical is trading at a P/S higher than the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Final Word

The large bounce in Suzhou Chunxing Precision Mechanical's shares has lifted the company's P/S handsomely. 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 Suzhou Chunxing Precision Mechanical currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Suzhou Chunxing Precision Mechanical, and understanding should be part of your investment process.

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.