What Shandong Xinneng Taishan Power Generation Co.,Ltd.'s (SZSE:000720) P/S Is Not Telling You

When close to half the companies in the Logistics industry in China have price-to-sales ratios (or "P/S") below 1.3x, you may consider Shandong Xinneng Taishan Power Generation Co.,Ltd. (SZSE:000720) as a stock to potentially avoid with its 2.9x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

View our latest analysis for Shandong Xinneng Taishan Power GenerationLtd

How Has Shandong Xinneng Taishan Power GenerationLtd Performed Recently?

For example, consider that Shandong Xinneng Taishan Power GenerationLtd's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Shandong Xinneng Taishan Power GenerationLtd will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For Shandong Xinneng Taishan Power GenerationLtd?

In order to justify its P/S ratio, Shandong Xinneng Taishan Power GenerationLtd would need to produce impressive growth in excess of the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 73%. As a result, revenue from three years ago have also fallen 76% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 15% shows it's an unpleasant look.

With this information, we find it concerning that Shandong Xinneng Taishan Power GenerationLtd is trading at a P/S higher than the industry. 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. 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.

The Bottom Line On Shandong Xinneng Taishan Power GenerationLtd's P/S

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that Shandong Xinneng Taishan Power GenerationLtd 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. 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.

You always need to take note of risks, for example - Shandong Xinneng Taishan Power GenerationLtd has 2 warning signs we think you should be aware of.

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.

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