What Shenghua Lande Scitech Limited's (HKG:8106) 32% Share Price Gain Is Not Telling You

Despite an already strong run, Shenghua Lande Scitech Limited (HKG:8106) shares have been powering on, with a gain of 32% in the last thirty days. The last 30 days bring the annual gain to a very sharp 43%.

Even after such a large jump in price, it's still not a stretch to say that Shenghua Lande Scitech's price-to-sales (or "P/S") ratio of 0.3x right now seems quite "middle-of-the-road" compared to the Electronic industry in Hong Kong, where the median P/S ratio is around 0.4x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for Shenghua Lande Scitech

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

Shenghua Lande Scitech certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. The P/S is probably moderate because investors think this strong revenue growth might not be enough to outperform the broader industry in the near future. 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.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Shenghua Lande Scitech's earnings, revenue and cash flow.

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

In order to justify its P/S ratio, Shenghua Lande Scitech would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered an exceptional 32% gain to the company's top line. However, this wasn't enough as the latest three year period has seen the company endure a nasty 31% drop in revenue in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 22% shows it's an unpleasant look.

With this information, we find it concerning that Shenghua Lande Scitech is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

The Key Takeaway

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.

The fact that Shenghua Lande Scitech currently trades at a P/S on par with the rest of the industry is surprising to us since its recent revenues have been in decline over the medium-term, all while the industry is set to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It is also worth noting that we have found 3 warning signs for Shenghua Lande Scitech that you need to take into consideration.

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.