There's Reason For Concern Over Shanghai Dazhong Public Utilities(Group) Co.,Ltd.'s (SHSE:600635) Price

When close to half the companies in the Gas Utilities industry in China have price-to-sales ratios (or "P/S") below 1.1x, you may consider Shanghai Dazhong Public Utilities(Group) Co.,Ltd. (SHSE:600635) as a stock to potentially avoid with its 1.9x P/S ratio. 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.

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

How Has Shanghai Dazhong Public Utilities(Group)Ltd Performed Recently?

For example, consider that Shanghai Dazhong Public Utilities(Group)Ltd's financial performance has been pretty ordinary lately as revenue growth is non-existent. One possibility is that the P/S is high because investors think the benign revenue growth will improve to outperform the broader industry in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

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.

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

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.

Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. Regardless, revenue has managed to lift by a handy 16% in aggregate from three years ago, thanks to the earlier period of growth. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

Comparing that to the industry, which is predicted to deliver 7.1% growth in the next 12 months, the company's momentum is pretty similar based on recent medium-term annualised revenue results.

With this information, we find it interesting that Shanghai Dazhong Public Utilities(Group)Ltd is trading at a high P/S compared to the industry. It seems most investors are ignoring the fairly average recent growth rates and are willing to pay up for exposure to the stock. Nevertheless, they may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Final Word

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Shanghai Dazhong Public Utilities(Group)Ltd revealed its three-year revenue trends aren't impacting its high P/S as much as we would have predicted, given they look similar to current industry expectations. Right now we are uncomfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

Plus, you should also learn about these 4 warning signs we've spotted with Shanghai Dazhong Public Utilities(Group)Ltd (including 3 which are a bit unpleasant).

If these risks are making you reconsider your opinion on Shanghai Dazhong Public Utilities(Group)Ltd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.