Despite an already strong run, Shanghai Electric Group Co., Ltd. (HKG:2727) shares have been powering on, with a gain of 26% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 75% in the last year.
In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about Shanghai Electric Group's P/S ratio of 0.4x, 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.
View 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. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value. Or at the very least, you'd be hoping it doesn't keep underperforming if your plan is to pick up some stock while it's not in favour.
Keen to find out how analysts think Shanghai Electric Group's future stacks up against the industry? In that case, our free report is a great place to start.How Is Shanghai Electric Group's Revenue Growth Trending?
There's an inherent assumption that a company should be matching the industry for P/S ratios like Shanghai Electric Group's to be considered reasonable.
In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 4.2%. The last three years don't look nice either as the company has shrunk revenue by 24% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.
Looking ahead now, revenue is anticipated to climb by 4.6% per annum during the coming three years according to the four analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 15% each year, which is noticeably more attractive.
With this in mind, we find it intriguing that Shanghai Electric Group's P/S is closely matching its industry peers. 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.
The Key Takeaway
Its shares have lifted substantially and now Shanghai Electric Group'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.
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. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Shanghai Electric Group that you should be aware of.
If you're unsure about the strength of Shanghai Electric Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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.