Xiamen King Long Motor Group Co., Ltd. (SHSE:600686) Held Back By Insufficient Growth Even After Shares Climb 34%

The Xiamen King Long Motor Group Co., Ltd. (SHSE:600686) share price has done very well over the last month, posting an excellent gain of 34%. Taking a wider view, although not as strong as the last month, the full year gain of 24% is also fairly reasonable.

Even after such a large jump in price, it would still be understandable if you think Xiamen King Long Motor Group is a stock with good investment prospects with a price-to-sales ratios (or "P/S") of 0.4x, considering almost half the companies in China's Machinery industry have P/S ratios above 2.4x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

View our latest analysis for Xiamen King Long Motor Group

What Does Xiamen King Long Motor Group's Recent Performance Look Like?

Xiamen King Long Motor Group has been doing a decent job lately as it's been growing revenue at a reasonable pace. Perhaps the market believes the recent revenue performance might fall short of industry figures in the near future, leading to a reduced P/S. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Although there are no analyst estimates available for Xiamen King Long Motor Group, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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

There's an inherent assumption that a company should underperform the industry for P/S ratios like Xiamen King Long Motor Group's to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 3.0% last year. This was backed up an excellent period prior to see revenue up by 34% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

This is in contrast to the rest of the industry, which is expected to grow by 22% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Xiamen King Long Motor Group's P/S sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Key Takeaway

Xiamen King Long Motor Group's stock price has surged recently, but its but its P/S still remains modest. 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.

In line with expectations, Xiamen King Long Motor Group maintains its low P/S on the weakness of its recent three-year growth being lower than the wider industry forecast. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Xiamen King Long Motor Group (at least 2 which make us uncomfortable), and understanding them should be part of your investment process.

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