Subdued Growth No Barrier To Shanghai Guao Electronic Technology Co., Ltd. (SZSE:300551) With Shares Advancing 36%

Those holding Shanghai Guao Electronic Technology Co., Ltd. (SZSE:300551) shares would be relieved that the share price has rebounded 36% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 19% in the last twelve months.

Following the firm bounce in price, Shanghai Guao Electronic Technology's price-to-sales (or "P/S") ratio of 11.7x might make it look like a strong sell right now compared to other companies in the Tech industry in China, where around half of the companies have P/S ratios below 4x and even P/S below 2x are quite common. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Shanghai Guao Electronic Technology

How Shanghai Guao Electronic Technology Has Been Performing

As an illustration, revenue has deteriorated at Shanghai Guao Electronic Technology over the last year, which is not ideal at all. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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 Guao Electronic Technology's earnings, revenue and cash flow.

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

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.

Retrospectively, the last year delivered a frustrating 43% decrease to the company's top line. 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 22% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this in mind, we find it worrying that Shanghai Guao Electronic Technology's P/S exceeds that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Final Word

Shanghai Guao Electronic Technology's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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 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. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Shanghai Guao Electronic Technology (1 is potentially serious) you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.