Thinker Agricultural Machinery Co., Ltd. (SHSE:603789) Stock Rockets 25% As Investors Are Less Pessimistic Than Expected

The Thinker Agricultural Machinery Co., Ltd. (SHSE:603789) share price has done very well over the last month, posting an excellent gain of 25%. Unfortunately, despite the strong performance over the last month, the full year gain of 5.0% isn't as attractive.

After such a large jump in price, given around half the companies in China's Machinery industry have price-to-sales ratios (or "P/S") below 3.2x, you may consider Thinker Agricultural Machinery as a stock to avoid entirely with its 7.3x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Check out our latest analysis for Thinker Agricultural Machinery

What Does Thinker Agricultural Machinery's P/S Mean For Shareholders?

Thinker Agricultural Machinery certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. It seems that many are expecting the strong revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. 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 Thinker Agricultural Machinery's earnings, revenue and cash flow.

How Is Thinker Agricultural Machinery's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Thinker Agricultural Machinery's to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 94%. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 24% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 25% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we find it worrying that Thinker Agricultural Machinery's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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 We Can Learn From Thinker Agricultural Machinery's P/S?

Thinker Agricultural Machinery's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

We've established that Thinker Agricultural Machinery 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.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Thinker Agricultural Machinery that 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.