Subdued Growth No Barrier To Shanghai Dazhong Public Utilities(Group) Co.,Ltd. (SHSE:600635) With Shares Advancing 27%

Those holding Shanghai Dazhong Public Utilities(Group) Co.,Ltd. (SHSE:600635) shares would be relieved that the share price has rebounded 27% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Looking back a bit further, it's encouraging to see the stock is up 29% in the last year.

After such a large jump in price, given close to half the companies operating in China's Gas Utilities industry have price-to-sales ratios (or "P/S") below 1.1x, you may consider Shanghai Dazhong Public Utilities(Group)Ltd as a stock to potentially avoid with its 1.9x 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.

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

How Shanghai Dazhong Public Utilities(Group)Ltd Has Been Performing

The recent revenue growth at Shanghai Dazhong Public Utilities(Group)Ltd would have to be considered satisfactory if not spectacular. 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.

Although there are no analyst estimates available for Shanghai Dazhong Public Utilities(Group)Ltd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Shanghai Dazhong Public Utilities(Group)Ltd's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as high as Shanghai Dazhong Public Utilities(Group)Ltd's is when the company's growth is on track to outshine the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 3.3% last year. Revenue has also lifted 20% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

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

With this information, we find it concerning that Shanghai Dazhong Public Utilities(Group)Ltd 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. 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.

The Key Takeaway

The large bounce in Shanghai Dazhong Public Utilities(Group)Ltd's shares has lifted the company's P/S handsomely. 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.

The fact that Shanghai Dazhong Public Utilities(Group)Ltd 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. 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 should always think about risks. Case in point, we've spotted 4 warning signs for Shanghai Dazhong Public Utilities(Group)Ltd you should be aware of, and 2 of them are significant.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.