There's Reason For Concern Over Suzhou Longway Eletronic Machinery Co., Ltd's (SZSE:301202) Massive 39% Price Jump

Suzhou Longway Eletronic Machinery Co., Ltd (SZSE:301202) shares have had a really impressive month, gaining 39% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 47%.

Since its price has surged higher, Suzhou Longway Eletronic Machinery may be sending bearish signals at the moment with its price-to-sales (or "P/S") ratio of 5.5x, since almost half of all companies in the Tech in China have P/S ratios under 4x and even P/S lower than 2x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

See our latest analysis for Suzhou Longway Eletronic Machinery

How Suzhou Longway Eletronic Machinery Has Been Performing

Suzhou Longway Eletronic Machinery certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. Perhaps the market is expecting future revenue performance to outperform the wider market, which has seemingly got people interested in the stock. 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 Longway Eletronic Machinery's earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

Suzhou Longway Eletronic Machinery's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Retrospectively, the last year delivered an exceptional 33% gain to the company's top line. As a result, it also grew revenue by 14% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Comparing that to the industry, which is predicted to deliver 17% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

In light of this, it's alarming that Suzhou Longway Eletronic Machinery's P/S sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. 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.

What Does Suzhou Longway Eletronic Machinery's P/S Mean For Investors?

Suzhou Longway Eletronic Machinery's P/S is on the rise since its shares have risen strongly. 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.

The fact that Suzhou Longway Eletronic Machinery currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. 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. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Suzhou Longway Eletronic Machinery that you need to be mindful of.

If these risks are making you reconsider your opinion on Suzhou Longway Eletronic Machinery, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.