What Xiangyang Automobile Bearing Co., Ltd.'s (SZSE:000678) 39% Share Price Gain Is Not Telling You

Xiangyang Automobile Bearing Co., Ltd. (SZSE:000678) shares have continued their recent momentum with a 39% gain in the last month alone. The last month tops off a massive increase of 111% in the last year.

After such a large jump in price, given close to half the companies operating in China's Auto Components industry have price-to-sales ratios (or "P/S") below 2.9x, you may consider Xiangyang Automobile Bearing as a stock to potentially avoid with its 4.3x 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.

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View our latest analysis for Xiangyang Automobile Bearing

What Does Xiangyang Automobile Bearing's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Xiangyang Automobile Bearing over the last year, which is not ideal at all. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Xiangyang Automobile Bearing's earnings, revenue and cash flow.

How Is Xiangyang Automobile Bearing's Revenue Growth Trending?

Xiangyang Automobile Bearing's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 7.4%. As a result, revenue from three years ago have also fallen 9.0% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 24% shows it's an unpleasant look.

With this in mind, we find it worrying that Xiangyang Automobile Bearing's P/S exceeds that of its industry peers. 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 very 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.

The Final Word

Xiangyang Automobile Bearing shares have taken a big step in a northerly direction, but its P/S is elevated as a result. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Xiangyang Automobile Bearing currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

You always need to take note of risks, for example - Xiangyang Automobile Bearing has 2 warning signs 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.

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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.