Shandong Kehui Power Automation Co.,Ltd.'s (SHSE:688681) 36% Price Boost Is Out Of Tune With Revenues

The Shandong Kehui Power Automation Co.,Ltd. (SHSE:688681) share price has done very well over the last month, posting an excellent gain of 36%. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 19% in the last twelve months.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about Shandong Kehui Power AutomationLtd's P/S ratio of 3.3x, since the median price-to-sales (or "P/S") ratio for the Electronic industry in China is also close to 4x. 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.

View our latest analysis for Shandong Kehui Power AutomationLtd

How Shandong Kehui Power AutomationLtd Has Been Performing

The revenue growth achieved at Shandong Kehui Power AutomationLtd over the last year would be more than acceptable for most companies. It might be that many expect the respectable revenue performance to wane, which has kept the P/S from rising. Those who are bullish on Shandong Kehui Power AutomationLtd 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 Shandong Kehui Power AutomationLtd's earnings, revenue and cash flow.

How Is Shandong Kehui Power AutomationLtd's Revenue Growth Trending?

The only time you'd be comfortable seeing a P/S like Shandong Kehui Power AutomationLtd's is when the company's growth is tracking the industry closely.

Taking a look back first, we see that the company grew revenue by an impressive 22% last year. The latest three year period has also seen a 6.8% overall rise in revenue, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 26% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this information, we find it interesting that Shandong Kehui Power AutomationLtd 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. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Bottom Line On Shandong Kehui Power AutomationLtd's P/S

Shandong Kehui Power AutomationLtd appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry 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.

Our examination of Shandong Kehui Power AutomationLtd 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. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. Unless the recent medium-term conditions improve, it's hard to accept the current share price as fair value.

Before you settle on your opinion, we've discovered 3 warning signs for Shandong Kehui Power AutomationLtd (1 doesn't sit too well with us!) that you should be aware of.

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.