Suzhou Wanxiang Technology Co.,Ltd (SZSE:301180) Stock Rockets 39% As Investors Are Less Pessimistic Than Expected

Suzhou Wanxiang Technology Co.,Ltd (SZSE:301180) shares have had a really impressive month, gaining 39% after a shaky period beforehand. Notwithstanding the latest gain, the annual share price return of 5.2% isn't as impressive.

Following the firm bounce in price, Suzhou Wanxiang TechnologyLtd may be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 7.7x, since almost half of all companies in the Electronic industry in China have P/S ratios under 4x and even P/S lower than 2x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View 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. 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 Suzhou Wanxiang TechnologyLtd's earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as steep as Suzhou Wanxiang TechnologyLtd's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered a frustrating 4.5% decrease to the company's top line. As a result, revenue from three years ago have also fallen 25% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 26% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we find it worrying that Suzhou Wanxiang TechnologyLtd's 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 Suzhou Wanxiang TechnologyLtd's P/S Mean For Investors?

Shares in Suzhou Wanxiang TechnologyLtd have seen a strong upwards swing lately, which has really helped boost its P/S figure. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Suzhou Wanxiang TechnologyLtd 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. 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. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

You should always think about risks. Case in point, we've spotted 4 warning signs for Suzhou Wanxiang TechnologyLtd you should be aware of, and 1 of them makes us a bit uncomfortable.

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.

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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.