Shaanxi Fenghuo Electronics Co., Ltd.'s (SZSE:000561) 27% Price Boost Is Out Of Tune With Revenues

The Shaanxi Fenghuo Electronics Co., Ltd. (SZSE:000561) share price has done very well over the last month, posting an excellent gain of 27%. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 10% over that time.

Although its price has surged higher, it's still not a stretch to say that Shaanxi Fenghuo Electronics' price-to-sales (or "P/S") ratio of 3.4x right now seems quite "middle-of-the-road" compared to the Communications industry in China, where the median P/S ratio is around 4.2x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

View our latest analysis for Shaanxi Fenghuo Electronics

What Does Shaanxi Fenghuo Electronics' Recent Performance Look Like?

Shaanxi Fenghuo Electronics could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. It might be that many expect the dour revenue performance to strengthen positively, which has kept the P/S from falling. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

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

Is There Some Revenue Growth Forecasted For Shaanxi Fenghuo Electronics?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Shaanxi Fenghuo Electronics' to be considered reasonable.

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 8.8%. As a result, revenue from three years ago have also fallen 4.0% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Shifting to the future, estimates from the sole analyst covering the company suggest revenue should grow by 29% over the next year. That's shaping up to be materially lower than the 42% growth forecast for the broader industry.

In light of this, it's curious that Shaanxi Fenghuo Electronics' P/S sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Final Word

Its shares have lifted substantially and now Shaanxi Fenghuo Electronics' 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.

When you consider that Shaanxi Fenghuo Electronics' revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. A positive change is needed in order to justify the current price-to-sales ratio.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Shaanxi Fenghuo Electronics with six simple checks.

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.