What Shanghai Qingpu Fire-Fighting Equipment Co., Ltd.'s (HKG:8115) 25% Share Price Gain Is Not Telling You

Despite an already strong run, Shanghai Qingpu Fire-Fighting Equipment Co., Ltd. (HKG:8115) shares have been powering on, with a gain of 25% in the last thirty days. This latest share price bounce rounds out a remarkable 1,281% gain over the last twelve months.

Since its price has surged higher, given around half the companies in Hong Kong's Electrical industry have price-to-sales ratios (or "P/S") below 0.4x, you may consider Shanghai Qingpu Fire-Fighting Equipment as a stock to avoid entirely with its 12.6x 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.

View our latest analysis for Shanghai Qingpu Fire-Fighting Equipment

How Has Shanghai Qingpu Fire-Fighting Equipment Performed Recently?

Revenue has risen firmly for Shanghai Qingpu Fire-Fighting Equipment recently, which is pleasing to see. One possibility is that the P/S ratio is high because investors think this respectable revenue growth will be enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

Although there are no analyst estimates available for Shanghai Qingpu Fire-Fighting Equipment, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as steep as Shanghai Qingpu Fire-Fighting Equipment's is when the company's growth is on track to outshine the industry decidedly.

Taking a look back first, we see that the company managed to grow revenues by a handy 9.2% last year. Still, revenue has barely risen at all in aggregate from three years ago, which is not ideal. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 19% over the next year, materially higher than the company's recent medium-term annualised growth rates.

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

The Key Takeaway

The strong share price surge has lead to Shanghai Qingpu Fire-Fighting Equipment's P/S soaring as well. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our examination of Shanghai Qingpu Fire-Fighting Equipment revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Shanghai Qingpu Fire-Fighting Equipment (at least 1 which is concerning), and understanding them should be part of your investment process.

If these risks are making you reconsider your opinion on Shanghai Qingpu Fire-Fighting Equipment, 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.