After Leaping 26% Shanghai Tianchen Co.,Ltd (SHSE:600620) Shares Are Not Flying Under The Radar

Shanghai Tianchen Co.,Ltd (SHSE:600620) shareholders have had their patience rewarded with a 26% share price jump in the last month. But the last month did very little to improve the 57% share price decline over the last year.

Following the firm bounce in price, when almost half of the companies in China's Transportation industry have price-to-sales ratios (or "P/S") below 2.6x, you may consider Shanghai TianchenLtd as a stock not worth researching with its 13.5x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Shanghai TianchenLtd

How Shanghai TianchenLtd Has Been Performing

For example, consider that Shanghai TianchenLtd'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 Shanghai TianchenLtd's earnings, revenue and cash flow.

How Is Shanghai TianchenLtd's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Shanghai TianchenLtd's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 29% decrease to the company's top line. In spite of this, the company still managed to deliver immense revenue growth over the last three years. Accordingly, shareholders will be pleased, but also have some serious questions to ponder about the last 12 months.

When compared to the industry's one-year growth forecast of 6.2%, the most recent medium-term revenue trajectory is noticeably more alluring

With this information, we can see why Shanghai TianchenLtd is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Final Word

Shares in Shanghai TianchenLtd have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

As we suspected, our examination of Shanghai TianchenLtd revealed its three-year revenue trends are contributing to its high P/S, given they look better than current industry expectations. At this stage investors feel the potential continued revenue growth in the future is great enough to warrant an inflated P/S. If recent medium-term revenue trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 4 warning signs for Shanghai TianchenLtd (of which 1 shouldn't be ignored!) 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.