Shanghai Hi-Tech Control System Co., Ltd (SZSE:002184) Stock Catapults 31% Though Its Price And Business Still Lag The Industry

Despite an already strong run, Shanghai Hi-Tech Control System Co., Ltd (SZSE:002184) shares have been powering on, with a gain of 31% in the last thirty days. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 13% over that time.

In spite of the firm bounce in price, Shanghai Hi-Tech Control System may still be sending very bullish signals at the moment with its price-to-sales (or "P/S") ratio of 1.7x, since almost half of all companies in the IT industry in China have P/S ratios greater than 4.8x and even P/S higher than 9x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so limited.

View our latest analysis for Shanghai Hi-Tech Control System

How Has Shanghai Hi-Tech Control System Performed Recently?

For instance, Shanghai Hi-Tech Control System's receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is low because investors think the company won't do enough to avoid underperforming the broader industry in the near future. Those who are bullish on Shanghai Hi-Tech Control System will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

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 Shanghai Hi-Tech Control System's earnings, revenue and cash flow.

How Is Shanghai Hi-Tech Control System's Revenue Growth Trending?

In order to justify its P/S ratio, Shanghai Hi-Tech Control System would need to produce anemic growth that's substantially trailing the industry.

Retrospectively, the last year delivered a frustrating 21% decrease to the company's top line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 14% 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.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 20% shows it's noticeably less attractive.

With this information, we can see why Shanghai Hi-Tech Control System is trading at a P/S lower than the industry. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Final Word

Shanghai Hi-Tech Control System's recent share price jump still sees fails to bring its P/S alongside the industry median. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

In line with expectations, Shanghai Hi-Tech Control System maintains its low P/S on the weakness of its recent three-year growth being lower than the wider industry forecast. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

It is also worth noting that we have found 1 warning sign for Shanghai Hi-Tech Control System that you need to take into consideration.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.