Optimistic Investors Push Shanghai Dazhong Public Utilities(Group) Co.,Ltd. (SHSE:600635) Shares Up 30% But Growth Is Lacking

Shanghai Dazhong Public Utilities(Group) Co.,Ltd. (SHSE:600635) shares have had a really impressive month, gaining 30% after a shaky period beforehand. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

Since its price has surged higher, you could be forgiven for thinking Shanghai Dazhong Public Utilities(Group)Ltd is a stock not worth researching with a price-to-sales ratios (or "P/S") of 1.6x, considering almost half the companies in China's Gas Utilities industry have P/S ratios below 1x. 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.

Check out our latest analysis for Shanghai Dazhong Public Utilities(Group)Ltd

What Does Shanghai Dazhong Public Utilities(Group)Ltd's P/S Mean For Shareholders?

Revenue has risen at a steady rate over the last year for Shanghai Dazhong Public Utilities(Group)Ltd, which is generally not a bad outcome. One possibility is that the P/S ratio is high because investors think this good revenue growth will be 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 Dazhong Public Utilities(Group)Ltd's earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

Shanghai Dazhong Public Utilities(Group)Ltd's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 6.7%. The solid recent performance means it was also able to grow revenue by 21% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 13% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Shanghai Dazhong Public Utilities(Group)Ltd is trading at a P/S higher than the industry. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Final Word

Shanghai Dazhong Public Utilities(Group)Ltd'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.

Our examination of Shanghai Dazhong Public Utilities(Group)Ltd revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Before you take the next step, you should know about the 3 warning signs for Shanghai Dazhong Public Utilities(Group)Ltd that we have uncovered.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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

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