Landai Technology Group Corp., Ltd.'s (SZSE:002765) 33% Price Boost Is Out Of Tune With Revenues

Despite an already strong run, Landai Technology Group Corp., Ltd. (SZSE:002765) shares have been powering on, with a gain of 33% in the last thirty days. The annual gain comes to 166% following the latest surge, making investors sit up and take notice.

Although its price has surged higher, it's still not a stretch to say that Landai Technology Group's price-to-sales (or "P/S") ratio of 2.6x right now seems quite "middle-of-the-road" compared to the Auto Components industry in China, where the median P/S ratio is around 2.8x. 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.

View our latest analysis for Landai Technology Group

How Has Landai Technology Group Performed Recently?

Landai Technology Group's revenue growth of late has been pretty similar to most other companies. The P/S ratio is probably moderate because investors think this modest revenue performance will continue. If this is the case, then at least existing shareholders won't be losing sleep over the current share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Landai Technology Group.

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

There's an inherent assumption that a company should be matching the industry for P/S ratios like Landai Technology Group's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 16% gain to the company's top line. The latest three year period has also seen a 11% overall rise in revenue, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Shifting to the future, estimates from the two analysts covering the company suggest revenue should grow by 15% over the next year. That's shaping up to be materially lower than the 25% growth forecast for the broader industry.

With this information, we find it interesting that Landai Technology Group is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

What We Can Learn From Landai Technology Group's P/S?

Landai Technology Group appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in 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.

Given that Landai Technology Group's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Landai Technology Group, and understanding should be part of your investment process.

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.

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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.