Dongguan Dingtong Precision Metal Co., Ltd. (SHSE:688668) shareholders would be excited to see that the share price has had a great month, posting a 36% gain and recovering from prior weakness. Looking back a bit further, it’s encouraging to see the stock is up 28% in the last year.
Since its price has surged higher, when almost half of the companies in China’s Electrical industry have price-to-sales ratios (or “P/S”) below 2.2x, you may consider Dongguan Dingtong Precision Metal as a stock not worth researching with its 7.6x P/S ratio. Nonetheless, we’d need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.
Check out our latest analysis for Dongguan Dingtong Precision Metal
How Has Dongguan Dingtong Precision Metal Performed Recently?
Dongguan Dingtong Precision Metal certainly has been doing a good job lately as it’s been growing revenue more than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. If not, then existing shareholders might be a little nervous about the viability of the share price.
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Is There Enough Revenue Growth Forecasted For Dongguan Dingtong Precision Metal?
In order to justify its P/S ratio, Dongguan Dingtong Precision Metal would need to produce outstanding growth that’s well in excess of the industry.
Taking a look back first, we see that the company managed to grow revenues by a handy 7.2% last year. This was backed up an excellent period prior to see revenue up by 77% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenues over that time.
Turning to the outlook, the next year should generate growth of 62% as estimated by the three analysts watching the company. That’s shaping up to be materially higher than the 23% growth forecast for the broader industry.
With this in mind, it’s not hard to understand why Dongguan Dingtong Precision Metal’s P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
What Does Dongguan Dingtong Precision Metal’s P/S Mean For Investors?
The strong share price surge has lead to Dongguan Dingtong Precision Metal’s P/S soaring as well. 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.
We’ve established that Dongguan Dingtong Precision Metal maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Electrical industry, as expected. It appears that shareholders are confident in the company’s future revenues, which is propping up the P/S. Unless these conditions change, they will continue to provide strong support to the share price.
Don’t forget that there may be other risks. For instance, we’ve identified 4 warning signs for Dongguan Dingtong Precision Metal (1 is potentially serious) you should be aware of.
If you’re unsure about the strength of Dongguan Dingtong Precision Metal’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.