Zhejiang Zhaolong Interconnect Technology Co.,Ltd.'s (SZSE:300913) Shares Climb 33% But Its Business Is Yet to Catch Up

Simply Wall St · 10/14 22:13

Zhejiang Zhaolong Interconnect Technology Co.,Ltd. (SZSE:300913) shares have had a really impressive month, gaining 33% after a shaky period beforehand. Looking further back, the 16% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

After such a large jump in price, you could be forgiven for thinking Zhejiang Zhaolong Interconnect TechnologyLtd is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 5.4x, considering almost half the companies in China's Electrical industry have P/S ratios below 2.2x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Zhejiang Zhaolong Interconnect TechnologyLtd

ps-multiple-vs-industry
SZSE:300913 Price to Sales Ratio vs Industry October 14th 2024

What Does Zhejiang Zhaolong Interconnect TechnologyLtd's Recent Performance Look Like?

With revenue growth that's superior to most other companies of late, Zhejiang Zhaolong Interconnect TechnologyLtd has been doing relatively well. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. If not, then existing shareholders might be a little nervous about the viability of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Zhejiang Zhaolong Interconnect TechnologyLtd.

Do Revenue Forecasts Match The High P/S Ratio?

Zhejiang Zhaolong Interconnect TechnologyLtd'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 10% last year. Revenue has also lifted 24% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 15% as estimated by the one analyst watching the company. That's shaping up to be materially lower than the 23% growth forecast for the broader industry.

With this information, we find it concerning that Zhejiang Zhaolong Interconnect TechnologyLtd is trading at a P/S higher than the industry. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

Shares in Zhejiang Zhaolong Interconnect TechnologyLtd have seen a strong upwards swing lately, which has really helped boost its P/S figure. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

It comes as a surprise to see Zhejiang Zhaolong Interconnect TechnologyLtd trade at such a high P/S given the revenue forecasts look less than stellar. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You always need to take note of risks, for example - Zhejiang Zhaolong Interconnect TechnologyLtd has 1 warning sign we think 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.