What Dalian Thermal Power Co.,Ltd.'s (SHSE:600719) 25% Share Price Gain Is Not Telling You

Dalian Thermal Power Co.,Ltd. (SHSE:600719) shareholders would be excited to see that the share price has had a great month, posting a 25% gain and recovering from prior weakness. Taking a wider view, although not as strong as the last month, the full year gain of 12% is also fairly reasonable.

Since its price has surged higher, given around half the companies in China's Integrated Utilities industry have price-to-sales ratios (or "P/S") below 2.2x, you may consider Dalian Thermal PowerLtd as a stock to avoid entirely with its 5.1x 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 so lofty.

See our latest analysis for Dalian Thermal PowerLtd

What Does Dalian Thermal PowerLtd's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Dalian Thermal PowerLtd over the last year, which is not ideal at all. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Dalian Thermal PowerLtd will help you shine a light on its historical performance.

How Is Dalian Thermal PowerLtd's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Dalian Thermal PowerLtd's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered a frustrating 20% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 5.3% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 5.6% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's alarming that Dalian Thermal PowerLtd's P/S sits above the majority of other companies. 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 Bottom Line On Dalian Thermal PowerLtd's P/S

Shares in Dalian Thermal PowerLtd have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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 Dalian Thermal PowerLtd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Dalian Thermal PowerLtd (2 shouldn't be ignored!) that you should be aware of before investing here.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.