Chengdu Road & Bridge Engineering CO.,LTD's (SZSE:002628) 45% Share Price Surge Not Quite Adding Up

Simply Wall St · 10/15 22:31

Chengdu Road & Bridge Engineering CO.,LTD (SZSE:002628) shares have continued their recent momentum with a 45% gain in the last month alone. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 4.7% in the last twelve months.

After such a large jump in price, you could be forgiven for thinking Chengdu Road & Bridge EngineeringLTD is a stock not worth researching with a price-to-sales ratios (or "P/S") of 2.3x, considering almost half the companies in China's Construction industry have P/S ratios below 1.1x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Chengdu Road & Bridge EngineeringLTD

ps-multiple-vs-industry
SZSE:002628 Price to Sales Ratio vs Industry October 15th 2024

What Does Chengdu Road & Bridge EngineeringLTD's P/S Mean For Shareholders?

For example, consider that Chengdu Road & Bridge EngineeringLTD's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Chengdu Road & Bridge EngineeringLTD will help you shine a light on its historical performance.

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

Chengdu Road & Bridge EngineeringLTD's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Retrospectively, the last year delivered a frustrating 25% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 53% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 14% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we find it worrying that Chengdu Road & Bridge EngineeringLTD's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Bottom Line On Chengdu Road & Bridge EngineeringLTD's P/S

Chengdu Road & Bridge EngineeringLTD shares have taken a big step in a northerly direction, but its P/S is elevated as a result. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Chengdu Road & Bridge EngineeringLTD currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Chengdu Road & Bridge EngineeringLTD that 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.