Optimistic Investors Push Shanghai Guao Electronic Technology Co., Ltd. (SZSE:300551) Shares Up 32% But Growth Is Lacking

Shanghai Guao Electronic Technology Co., Ltd. (SZSE:300551) shares have continued their recent momentum with a 32% gain in the last month alone. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 44% in the last twelve months.

Following the firm bounce in price, you could be forgiven for thinking Shanghai Guao Electronic Technology is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 14x, considering almost half the companies in China's Tech industry have P/S ratios below 3.2x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Check out our latest analysis for Shanghai Guao Electronic Technology

How Has Shanghai Guao Electronic Technology Performed Recently?

For example, consider that Shanghai Guao Electronic Technology's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

Although there are no analyst estimates available for Shanghai Guao Electronic Technology, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Shanghai Guao Electronic Technology would need to produce outstanding growth that's well in excess of the industry.

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 43%. Still, the latest three year period has seen an excellent 35% overall rise in revenue, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 16% 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 concerning that Shanghai Guao Electronic Technology is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

The strong share price surge has lead to Shanghai Guao Electronic Technology's P/S soaring as well. 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.

Our examination of Shanghai Guao Electronic Technology revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Shanghai Guao Electronic Technology you should know about.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.