There's Reason For Concern Over JoulWatt Technology Co., Ltd.'s (SHSE:688141) Massive 29% Price Jump

Despite an already strong run, JoulWatt Technology Co., Ltd. (SHSE:688141) shares have been powering on, with a gain of 29% in the last thirty days. Taking a wider view, although not as strong as the last month, the full year gain of 13% is also fairly reasonable.

Following the firm bounce in price, JoulWatt Technology may be sending sell signals at present with a price-to-sales (or "P/S") ratio of 8.9x, when you consider almost half of the companies in the Semiconductor industry in China have P/S ratios under 7.3x and even P/S lower than 3x aren't out of the ordinary. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for JoulWatt Technology

How Has JoulWatt Technology Performed Recently?

JoulWatt Technology could be doing better as it's been growing revenue less than most other companies lately. It might be that many expect the uninspiring revenue performance to recover significantly, which has kept the P/S ratio from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

Keen to find out how analysts think JoulWatt Technology's future stacks up against the industry? In that case, our free report is a great place to start.

How Is JoulWatt Technology's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as high as JoulWatt Technology's is when the company's growth is on track to outshine the industry.

Retrospectively, the last year delivered a decent 5.1% gain to the company's revenues. Pleasingly, revenue has also lifted 42% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenues over that time.

Turning to the outlook, the next year should generate growth of 47% as estimated by the two analysts watching the company. With the industry predicted to deliver 49% growth , the company is positioned for a comparable revenue result.

In light of this, it's curious that JoulWatt Technology's P/S sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

JoulWatt Technology shares have taken a big step in a northerly direction, but its P/S is elevated as a result. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Given JoulWatt Technology's future revenue forecasts are in line with the wider industry, the fact that it trades at an elevated P/S is somewhat surprising. The fact that the revenue figures aren't setting the world alight has us doubtful that the company's elevated P/S can be sustainable for the long term. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You always need to take note of risks, for example - JoulWatt Technology has 1 warning sign we think you should be aware of.

If these risks are making you reconsider your opinion on JoulWatt Technology, 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.