Subdued Growth No Barrier To Shenghua Lande Scitech Limited (HKG:8106) With Shares Advancing 33%

Shenghua Lande Scitech Limited (HKG:8106) shares have continued their recent momentum with a 33% gain in the last month alone. The last 30 days were the cherry on top of the stock's 371% gain in the last year, which is nothing short of spectacular.

Although its price has surged higher, you could still be forgiven for feeling indifferent about Shenghua Lande Scitech's P/S ratio of 0.8x, since the median price-to-sales (or "P/S") ratio for the Electronic industry in Hong Kong is also close to 0.5x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

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View our latest analysis for Shenghua Lande Scitech

What Does Shenghua Lande Scitech's P/S Mean For Shareholders?

Recent times have been quite advantageous for Shenghua Lande Scitech as its revenue has been rising very briskly. It might be that many expect the strong revenue performance to wane, which has kept the share price, and thus the P/S ratio, from rising. Those who are bullish on Shenghua Lande Scitech will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

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

Is There Some Revenue Growth Forecasted For Shenghua Lande Scitech?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Shenghua Lande Scitech's to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 63%. The latest three year period has also seen a 22% overall rise in revenue, aided extensively 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.

This is in contrast to the rest of the industry, which is expected to grow by 16% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it interesting that Shenghua Lande Scitech is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What We Can Learn From Shenghua Lande Scitech's P/S?

Its shares have lifted substantially and now Shenghua Lande Scitech's P/S is back within range of the industry median. 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.

We've established that Shenghua Lande Scitech's average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. Right now we are uncomfortable with the P/S as this revenue performance isn't likely to support a more positive sentiment for long. If recent medium-term revenue trends continue, the probability of a share price decline will become quite substantial, placing shareholders at risk.

Before you settle on your opinion, we've discovered 3 warning signs for Shenghua Lande Scitech (2 shouldn't be ignored!) that you should be aware of.

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.