Sunray Engineering Group Limited's (HKG:8616) 38% Share Price Surge Not Quite Adding Up

Sunray Engineering Group Limited (HKG:8616) shares have had a really impressive month, gaining 38% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 96% in the last year.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about Sunray Engineering Group's P/S ratio of 0.3x, since the median price-to-sales (or "P/S") ratio for the Construction industry in Hong Kong is also close to 0.4x. 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.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

View our latest analysis for Sunray Engineering Group

How Sunray Engineering Group Has Been Performing

Revenue has risen firmly for Sunray Engineering Group recently, which is pleasing to see. One possibility is that the P/S is moderate because investors think this respectable revenue growth might not be enough to outperform the broader industry in the near future. Those who are bullish on Sunray Engineering Group will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Sunray Engineering Group will help you shine a light on its historical performance.

Do Revenue Forecasts Match The P/S Ratio?

The only time you'd be comfortable seeing a P/S like Sunray Engineering Group's is when the company's growth is tracking the industry closely.

If we review the last year of revenue growth, the company posted a worthy increase of 8.5%. However, this wasn't enough as the latest three year period has seen an unpleasant 20% overall drop in revenue. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 20% 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 Sunray Engineering Group's P/S exceeds that of its industry peers. 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. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What Does Sunray Engineering Group's P/S Mean For Investors?

Sunray Engineering Group's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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.

Our look at Sunray Engineering Group revealed its shrinking revenues over the medium-term haven't impacted the P/S as much as we anticipated, given the industry is set to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you take the next step, you should know about the 2 warning signs for Sunray Engineering Group that we have uncovered.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.