There's Reason For Concern Over Guangdong Green Precision Components Co., Ltd's (SZSE:300968) Massive 27% Price Jump

Guangdong Green Precision Components Co., Ltd (SZSE:300968) shareholders are no doubt pleased to see that the share price has bounced 27% in the last month, although it is still struggling to make up recently lost ground. The annual gain comes to 168% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, you could be forgiven for thinking Guangdong Green Precision Components is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 6.7x, considering almost half the companies in China's Tech industry have P/S ratios below 3.6x. 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 Guangdong Green Precision Components

What Does Guangdong Green Precision Components' Recent Performance Look Like?

For example, consider that Guangdong Green Precision Components' financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. If not, then existing shareholders may be quite nervous about the viability of the share price.

Although there are no analyst estimates available for Guangdong Green Precision Components, 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?

Guangdong Green Precision Components' 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.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 5.0%. As a result, revenue from three years ago have also fallen 24% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 18% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

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

What Does Guangdong Green Precision Components' P/S Mean For Investors?

Guangdong Green Precision Components' P/S has grown nicely over the last month thanks to a handy boost in the share price. 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 Guangdong Green Precision Components revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. 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.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Guangdong Green Precision Components (of which 1 doesn't sit too well with us!) you should know about.

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.