Revenues Not Telling The Story For Lifan Technology(Group)Co.,Ltd. (SHSE:601777) After Shares Rise 47%

Lifan Technology(Group)Co.,Ltd. (SHSE:601777) shares have had a really impressive month, gaining 47% after a shaky period beforehand. Unfortunately, despite the strong performance over the last month, the full year gain of 8.1% isn't as attractive.

After such a large jump in price, when almost half of the companies in China's Auto industry have price-to-sales ratios (or "P/S") below 1.8x, you may consider Lifan Technology(Group)Co.Ltd as a stock probably not worth researching with its 2.6x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

Check out our latest analysis for Lifan Technology(Group)Co.Ltd

How Has Lifan Technology(Group)Co.Ltd Performed Recently?

As an illustration, revenue has deteriorated at Lifan Technology(Group)Co.Ltd over the last year, which is not ideal at all. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Although there are no analyst estimates available for Lifan Technology(Group)Co.Ltd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Lifan Technology(Group)Co.Ltd?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Lifan Technology(Group)Co.Ltd's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 17% decrease to the company's top line. Even so, admirably revenue has lifted 81% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Comparing that to the industry, which is predicted to deliver 54% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this information, we find it concerning that Lifan Technology(Group)Co.Ltd is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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 recent growth rates.

The Bottom Line On Lifan Technology(Group)Co.Ltd's P/S

Lifan Technology(Group)Co.Ltd 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.

Our examination of Lifan Technology(Group)Co.Ltd revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Lifan Technology(Group)Co.Ltd with six simple checks will allow you to discover any risks that could be an issue.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.

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