With SMS Electric Co.,Ltd.Zhengzhou (SZSE:002857) It Looks Like You'll Get What You Pay For

When close to half the companies in the Electronic industry in China have price-to-sales ratios (or "P/S") below 3.6x, you may consider SMS Electric Co.,Ltd.Zhengzhou (SZSE:002857) as a stock to avoid entirely with its 5.7x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

Check out our latest analysis for SMS ElectricLtd.Zhengzhou

How Has SMS ElectricLtd.Zhengzhou Performed Recently?

SMS ElectricLtd.Zhengzhou certainly has been doing a good job lately as it's been growing revenue more than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on analyst estimates for the company? Then our free report on SMS ElectricLtd.Zhengzhou will help you uncover what's on the horizon.

What Are Revenue Growth Metrics Telling Us About The High P/S?

SMS ElectricLtd.Zhengzhou's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered a decent 8.3% gain to the company's revenues. The latest three year period has also seen a 10% overall rise in revenue, aided somewhat 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.

Looking ahead now, revenue is anticipated to climb by 590% during the coming year according to the one analyst following the company. Meanwhile, the rest of the industry is forecast to only expand by 60%, which is noticeably less attractive.

With this in mind, it's not hard to understand why SMS ElectricLtd.Zhengzhou's P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that SMS ElectricLtd.Zhengzhou maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Electronic industry, as expected. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

We don't want to rain on the parade too much, but we did also find 2 warning signs for SMS ElectricLtd.Zhengzhou that you need to be mindful of.

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.