Guangxi Energy Co., Ltd.'s (SHSE:600310) 43% Price Boost Is Out Of Tune With Revenues

Guangxi Energy Co., Ltd. (SHSE:600310) shares have had a really impressive month, gaining 43% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 39%.

Although its price has surged higher, there still wouldn't be many who think Guangxi Energy's price-to-sales (or "P/S") ratio of 1.5x is worth a mention when it essentially matches the median P/S in China's Electric Utilities industry. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for Guangxi Energy

What Does Guangxi Energy's Recent Performance Look Like?

Guangxi Energy has been struggling lately as its revenue has declined faster than most other companies. Perhaps the market is expecting future revenue performance to begin matching the rest of the industry, which has kept the P/S from declining. You'd much rather the company improve its revenue if you still believe in the business. Or at the very least, you'd be hoping it doesn't keep underperforming if your plan is to pick up some stock while it's not in favour.

Keen to find out how analysts think Guangxi Energy's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Guangxi Energy's Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Guangxi Energy's to be considered reasonable.

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 61% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to slump, contracting by 7.1% during the coming year according to the sole analyst following the company. That's not great when the rest of the industry is expected to grow by 7.3%.

With this information, we find it concerning that Guangxi Energy is trading at a fairly similar P/S compared to the industry. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the negative growth outlook.

What We Can Learn From Guangxi Energy's P/S?

Its shares have lifted substantially and now Guangxi Energy's P/S is back within range of the industry median. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our check of Guangxi Energy's analyst forecasts revealed that its outlook for shrinking revenue isn't bringing down its P/S as much as we would have predicted. When we see a gloomy outlook like this, our immediate thoughts are that the share price is at risk of declining, negatively impacting P/S. If we consider the revenue outlook, the P/S seems to indicate that potential investors may be paying a premium for the stock.

It is also worth noting that we have found 3 warning signs for Guangxi Energy (2 don't sit too well with us!) that you need to take into consideration.

If you're unsure about the strength of Guangxi Energy'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.