Shanghai Qingpu Fire-Fighting Equipment Co., Ltd. (HKG:8115) Stock Rockets 26% As Investors Are Less Pessimistic Than Expected

Shanghai Qingpu Fire-Fighting Equipment Co., Ltd. (HKG:8115) shareholders have had their patience rewarded with a 26% share price jump in the last month. The last 30 days were the cherry on top of the stock's 989% gain in the last year, which is nothing short of spectacular.

After such a large jump in price, you could be forgiven for thinking Shanghai Qingpu Fire-Fighting Equipment is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 10.1x, considering almost half the companies in Hong Kong's Electrical industry have P/S ratios below 0.5x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Shanghai Qingpu Fire-Fighting Equipment

How Has Shanghai Qingpu Fire-Fighting Equipment Performed Recently?

The revenue growth achieved at Shanghai Qingpu Fire-Fighting Equipment over the last year would be more than acceptable for most companies. It might be that many expect the respectable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Shanghai Qingpu Fire-Fighting Equipment will help you shine a light on its historical performance.

How Is Shanghai Qingpu Fire-Fighting Equipment's Revenue Growth Trending?

Shanghai Qingpu Fire-Fighting Equipment's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 14% last year. The latest three year period has also seen a 16% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 17% shows it's noticeably less attractive.

With this information, we find it concerning that Shanghai Qingpu Fire-Fighting Equipment 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.

What Does Shanghai Qingpu Fire-Fighting Equipment's P/S Mean For Investors?

The strong share price surge has lead to Shanghai Qingpu Fire-Fighting Equipment's P/S soaring as well. 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.

The fact that Shanghai Qingpu Fire-Fighting Equipment 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. 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.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Shanghai Qingpu Fire-Fighting Equipment that you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.