Shanghai Electric Group Co., Ltd.'s (HKG:2727) 26% Share Price Surge Not Quite Adding Up

The Shanghai Electric Group Co., Ltd. (HKG:2727) share price has done very well over the last month, posting an excellent gain of 26%. Notwithstanding the latest gain, the annual share price return of 4.5% isn't as impressive.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Shanghai Electric Group's P/S ratio of 0.2x, since the median price-to-sales (or "P/S") ratio for the Electrical industry in Hong Kong is also close to 0.5x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Check out our latest analysis for Shanghai Electric Group

How Shanghai Electric Group Has Been Performing

With revenue that's retreating more than the industry's average of late, Shanghai Electric Group has been very sluggish. Perhaps the market is expecting future revenue performance to begin matching the rest of the industry, which has kept the P/S from declining. If you still like the company, you'd want its revenue trajectory to turn around before making any decisions. If not, then existing shareholders may be a little nervous about the viability of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Shanghai Electric Group.

What Are Revenue Growth Metrics Telling Us About The P/S?

Shanghai Electric Group's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

Retrospectively, the last year delivered a frustrating 7.3% 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 24% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Looking ahead now, revenue is anticipated to climb by 4.7% per year during the coming three years according to the four analysts following the company. With the industry predicted to deliver 17% growth per annum, the company is positioned for a weaker revenue result.

With this information, we find it interesting that Shanghai Electric Group is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What We Can Learn From Shanghai Electric Group's P/S?

Shanghai Electric Group's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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.

Given that Shanghai Electric Group's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Shanghai Electric Group with six simple checks will allow you to discover any risks that could be an issue.

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.