Suzhou Wanxiang Technology Co.,Ltd (SZSE:301180) Stock Rockets 34% As Investors Are Less Pessimistic Than Expected

Suzhou Wanxiang Technology Co.,Ltd (SZSE:301180) shares have had a really impressive month, gaining 34% after a shaky period beforehand. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 3.2% over the last year.

Following the firm bounce in price, you could be forgiven for thinking Suzhou Wanxiang TechnologyLtd is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 8.4x, considering almost half the companies in China's Electronic industry have P/S ratios below 3.6x. 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 Suzhou Wanxiang TechnologyLtd

What Does Suzhou Wanxiang TechnologyLtd's Recent Performance Look Like?

For example, consider that Suzhou Wanxiang TechnologyLtd's 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Suzhou Wanxiang TechnologyLtd will help you shine a light on its historical performance.

How Is Suzhou Wanxiang TechnologyLtd's Revenue Growth Trending?

Suzhou Wanxiang TechnologyLtd'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.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 17%. The last three years don't look nice either as the company has shrunk revenue by 31% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 25% shows it's an unpleasant look.

With this in mind, we find it worrying that Suzhou Wanxiang TechnologyLtd's P/S exceeds that of its industry peers. 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 Suzhou Wanxiang TechnologyLtd's P/S soaring as well. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We've established that Suzhou Wanxiang TechnologyLtd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

There are also other vital risk factors to consider and we've discovered 4 warning signs for Suzhou Wanxiang TechnologyLtd (2 make us uncomfortable!) that you should be aware of before investing here.

If you're unsure about the strength of Suzhou Wanxiang TechnologyLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.

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