Xi'an Typical Industries Co.,Ltd's (SHSE:600302) 28% Price Boost Is Out Of Tune With Revenues

Xi'an Typical Industries Co.,Ltd (SHSE:600302) shares have had a really impressive month, gaining 28% after a shaky period beforehand. Taking a wider view, although not as strong as the last month, the full year gain of 22% is also fairly reasonable.

After such a large jump in price, when almost half of the companies in China's Machinery industry have price-to-sales ratios (or "P/S") below 3.4x, you may consider Xi'an Typical IndustriesLtd as a stock probably not worth researching with its 4.6x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

Check out our latest analysis for Xi'an Typical IndustriesLtd

What Does Xi'an Typical IndustriesLtd's Recent Performance Look Like?

For instance, Xi'an Typical IndustriesLtd's receding revenue in recent times would have to be some food for thought. 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. If not, then existing shareholders may be quite nervous about the viability of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Xi'an Typical IndustriesLtd will help you shine a light on its historical performance.

How Is Xi'an Typical IndustriesLtd's Revenue Growth Trending?

Xi'an Typical IndustriesLtd'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 8.7%. The last three years don't look nice either as the company has shrunk revenue by 78% in aggregate. 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 22% shows it's an unpleasant look.

With this in mind, we find it worrying that Xi'an Typical IndustriesLtd'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. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What Does Xi'an Typical IndustriesLtd's P/S Mean For Investors?

The large bounce in Xi'an Typical IndustriesLtd's shares has lifted the company's P/S handsomely. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our examination of Xi'an Typical IndustriesLtd revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. 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. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you settle on your opinion, we've discovered 1 warning sign for Xi'an Typical IndustriesLtd that you should be aware of.

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.